If you own shares in Walgreens Boots Alliance (NASDAQ: WBA) hoping for a quick recovery, i think now is the time to cut your losses on the struggling pharmacy chain and reallocate your capital elsewhere. Here’s why.
A common investment hypothesis for this stock is now dead
One of the criteria that can help an investor decide when to sell a stock is whether the investment hypothesis he formulated as a reason for buying the stock is still valid.
Let’s say you bought Walgreens stock 10 years ago, expecting it to be a safe stock that would generate a steady and growing dividend income and modest share price appreciation. You might also have expected the industry, which provides retail pharmacy services, to hold up relatively well over time, even as the world changed dramatically.
But that proposition has not turned out as expected.
Over the past 10 years, the stock’s total return has fallen by just over 80%. Over the same period, quarterly free cash flow (FCF) has fallen by 53% to just $327 million. In early January of this year, Walgreens cut its quarterly dividend by 48% from the previous quarter, to $0.25 per share.
In the past 12 months alone, the company has spent nearly $27 billion on debt service, refusing to use that capital for growth opportunities or return it to shareholders.
To recap, it wasn’t a safe investment, it didn’t provide consistent dividend income, and while people still had to go to the pharmacy to pick up their medication, that factor apparently wasn’t relevant to maintaining the share price.
Moreover, it is not the case that the pharmaceutical industry as a whole is struggling, which would at least be some consolation for the stock’s disappointing performance. Walgreens’ biggest competitor, CVS Healthsaw the total return of its stocks decline by about 4% over the past 10 years, while its quarterly FCF and dividend soared. Check out this chart:
So what’s keeping Walgreens down? Its core prescription-filling segment is holding up relatively well, with prescriptions filled (excluding vaccinations) up 1.7% year over year in the fiscal third quarter (ended May 31).
But sales of nonprescription health care products are declining, as are prescription reimbursements from insurers. The boost the company got when the economy reopened in 2021 is long gone. More importantly, the effort to diversify into primary care is expensive, and while it’s no longer a money-spinner, it still doesn’t generate nearly enough to support the top or bottom line.
There’s no concrete hope of salvation on the horizon. The only path forward in the short term is for Walgreens to continue selling its investments and other assets to service its debt, while cutting operating costs and boosting its most profitable segments. Such moves could cause it to forgo some revenue. And its total assets will likely continue to shrink, further driving down its stock price.
Even if you are patient, it is time to sell
It is true that Walgreens could sustain itself for the next decade or more. Ultimately, the primary care segment could become a formidable profit center. And the pharmacy segment, given enough time, could become efficient again.
But there is not much evidence yet that these processes have gone much beyond the starting line. Shareholders are also not obliged to stick around after their investment thesis has been invalidated, regardless of the precise reasons.
Therefore, I think the best move is to sell the stock now. Even if you are optimistic about a recovery — and it is hard to see why at this point — there could be more downside in the stock. It is safer to get out now and come back later when you see the seeds of a recovery.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
1 Healthcare Stock You Should Sell Now And Never Look Back on was originally published by The Motley Fool
