Walgreens Boots Alliance (WBA) cut its dividend because of high debt and leverage and lower free cash flow, limiting its ability to invest in growth initiatives.The company’s struggles have caused the share price to decline since its peak in 2015. Simultaneously, the yield had surged to almost 10% at its high, a value usually associated with distressed companies. Investors have sold off this dividend stock because of poor performance and fears of a dividend cut. However, we do not expect another reduction soon.

Overview of Walgreens Boots 
Walgreens Boots Alliance (WBA) was founded in 1909. Today, it is one of the largest pharmacy retail chains in the world. It operates in three business segments: U.S. Retail Pharmacy, International, and U.S. Healthcare. The drug store chain operates globally with about 9,000+ outlets in the United States and another 4,000+ Boots stores in the United Kingdom. In the past decade, the firm grew through a series of acquisitions and mergers, like the Walgreens and Boots merger, the purchase of Duane Reade, and the buying of some of Rite-Aid’s stores.Besides retail, the company has purchased several companies intending to grow its healthcare offerings, such as VillageMD for primary care, CareCentrix for post-acute care, Shields Health Solutions for specialty pharmacy, and Walgreens Health. Walgreens also owns about 25% of AmerisourceBergen (ABC).Total revenue was $139,081 million in fiscal year 2023 and in the past twelve months.

Dividend Cut Announcement
Walgreens Boots (WBA) cut its dividend on Thursday, January 4, 2024. The retailer’s quarterly dividend was $0.48 per share before the announcement. The dividend is now $0.25 per share, a nearly 48% reduction. In a press release, the company’s CEO, Tim Wentworth, said,

“Since the start of my tenure with WBA, we have been evaluating our options across our strategies and operations, including those related to our capital allocation. We have made the difficult decision to reduce our quarterly dividend payment to 25 cents per share, to strengthen our long-term balance sheet and cash position. This action reinforces our goal of increasing cash flow, while freeing up capital to invest in sustainable growth initiatives in our pharmacy and healthcare businesses, which we believe will ultimately improve shareholder value.”

The company’s Executive Chairman, Stefano Pessina, said,

“The WBA board is committed to ensuring that capital allocation priorities are balanced between investment opportunities for growth, debt paydown, and returning cash to investors. Importantly, we are maintaining a competitive yield as our board continues to view the dividend as a key component to overall attractiveness of WBA to many of our shareholders.”

By announcing a dividend cut, Walgreens Boots (WBA) is obviously trying to shore up its balance sheet and cash flow. The firm was taking on debt for healthcare services acquisitions, which were yet to be profitable, affecting cash flow and earnings per share. The company lost its 48-year dividend increase streak and is no longer a Dividend Aristocrat or Dividend Champion. However, it still has a 91-year streak of paying dividends.

Challenges
Walgreens is attempting to expand beyond pharmacy retailing by acquiring healthcare companies. As a result, it employed a significant amount of debt, which has become more expensive. Despite some tailwinds from the COVID-19 pandemic and vaccines, the firm faces elevated competition in its core operations. However, debt and leverage are more significant challenges.Hence, the company has struggled. Walgreen Boots was one of the three worst-performing Dow Jones stocks in 2023, the third year out of five it has been on the list. 

Too Much Debt and Leverage
Walgreens Boots’ debt has more than doubled in the past five years. At the end of fiscal year 2019, net debt was $15,813 million. However, by the end of the fiscal year 2023, net debt was $33,772 million. Consequently, leverage rose from a moderate 2.34X to approximately 4.1X. Values more than 3.0X are generally a signal of a distressed company. Additionally, interest coverage declined quickly from ~7.4X to ~3.65X, a low value.The credit rating agencies have noticed the declining operational performance and too high leverage and downgraded the firm. Currently, the credit rating is BBB/Ba2, a lower-medium investment grade.Further, cash from operations has nearly halved in five years, while capital expenditures have risen. The result has been much lower free cash flow, meaning Walgreens Boots has less flexibility to service debt.

Rising Interest Rates
Another issue related to leverage is rising interest rates, making debt more expensive. Refinancing existing loans will probably occur at high rates. That said, the firm has used the sale of some international retail operations and AmerisourceBergen stock to lower debt instead of refinancing it. In addition, the firm is projecting lower interest expense in FY 2024 than in 2023 because they are assuming lower debt balances.

Dividend Safety
Walgreens Boots’ dividend safety has declined for some time. Before the cut, the pharmacy retailer received a dividend quality grade of ‘C+,’ from Portfolio Insight. Thus, it was in the 60th percentile of stocks.Despite slashing the dividend by almost 48%, the computed dividend yield is still elevated at about 3.91%, a respectable value. The quarterly rate is $0.25 per share. The forward dividend yield is more than double the mean value of the S&P 500 Index.The annual dividend now requires about $864 million ($1.00 yearly dividend x 864 million shares) compared to $1,659 million in FY 2023. Also, the dividend payout ratio will improve to roughly 25%. Interestingly, it was not high before the cut at approximately 48%. We anticipate that the annual savings will be used for debt repayment and investment in healthcare initiatives.The dividend is clearly on better footing now, and we do not expect Walgreens Boots (WBA) to execute another cut in the foreseeable future. Source: Portfolio Insight

Final Thoughts on Walgreens Boots (WBA) Dividend Cut
The desire to grow in the healthcare market by acquisition has caused Walgreens Boots to increase net debt and leverage. Moreover, free cash flow had fallen considerably. Hence, the company has been struggling to service debt and grow at the same time. Also, the credit rating agencies have lowered the firm’s rating. Consequently, Walgreens Boots (WBA) cut its dividend.More By This Author:The 2023 Economy And Stock Market Year In Review
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