Understanding the Secureness of Walgreens' Generous Dividend Yield
If the dividend yield for a stock you're contemplating surpasses 10%, you ought to scrutinize the business thoroughly to ascertain if that payout is secure. If it's secure, there's a likelihood other investors will be snapping up such an opportunity (subsequently lowering the yield as a result). A dividend this high generates substantial income, augmenting overall returns, and functioning as a superb buffer during turbulent market conditions.
Walgreens (BOOT -1.12%) trimmed its dividend at the start of the year. Nevertheless, the significant decrease in its stock price post-cut has kept its yield high – currently hovering around 12.1%. At such a high percentage, an investment of around $8,300 can yield an annual $1,000 in dividends. However, what if Walgreens slashes the dividend yet again? That would likely impact both your dividend income and share price.
Let's delve deeper to assess if Walgreens' (reduced) dividend is viable, and determine if investors should anticipate another imminent cut.
Walgreens continues to grapple with profitability
A significant red flag for dividend investors is if a company can't maintain profitability. When that happens, dividend cuts often follow. Eventually, a suspension of the payout occurs if management fails to see a way to turn around the situation.
Walgreens reported an operating loss in three out of the past four quarters. For its most recent fiscal year, ending on August 31, the company's operating loss totaled $14.1 billion. Of this, $12.7 billion was due to non-cash goodwill impairment charges. If these one-time charges are excluded, the operating loss would have been approximately $1.4 billion – lower than the $6.9 billion loss in the previous year.
While this improvement might offer some comfort, it might not instill much trust in investors seeking assurance that the dividend is stable.
Walgreens' difficult financial situation could lead to more significant changes
Walgreens also faces cash flow challenges, likely magnifying concerns about its dividend. The company has been considering asset sales as a way to boost its cash flow due to weak operating results. In the preceding 12 months, Walgreens' operating cash flow was barely above $1 billion, while its free cash flow was negative. At its current dividend rate, Walgreens pays approximately $864 million in cash dividends per annum.
Given the company's investment into expanding its healthcare business and launching primary care clinics, the business requires a stronger financial position to balance both its growth aspirations and its dividend payments. However, at present, Walgreens may need to prioritize one over the other – the dividend or growth – as balancing both for an extended period seems unrealistic.
CEO Tim Wentworth reduced the dividend in January after only a few months in the role. Now, with more time to analyze the company's situation, more drastic changes could be on the horizon for Walgreens. The company plans to close 1,200 pharmacy retail locations over the next couple of years, but that may not be enough to stabilize its operations.
Investors should not rely on Walgreens' dividend
I wouldn't advocate investing in Walgreens for its dividend. Over the past five years, the stock has lost over 85% of its value, leading to the high yield, even following a dividend cut earlier. Unless you are comfortable with a high risk profile and maintain faith in the company's new CEO, you might be better off avoiding Walgreens, as there are numerous safer dividend stocks currently available.
As alluring as the yield may appear, there's a real risk that the dividend could be reduced or suspended at any time, given the uncertainty the business faces both in the short term and long term.
Despite Walgreens' plans to close pharmacy retail locations, the company's financial situation remains challenging, which may necessitate further dividend cuts or suspensions. Investors should be cautious, as reliance on Walgreens' dividend could lead to significant financial losses due to potential changes in payout policies. On the other hand, exploring alternative dividend stocks with a more stable financial outlook might provide a safer investment opportunity.
