Walgreens Boots Alliance(NASDAQ: WBA) is a household name in healthcare. Consumers in America and worldwide have been visiting their neighborhood pharmacies for generations.
However, the company has fallen on hard times. Clumsy attempts to expand the company sank the balance sheet and caused a 90% drop from the stock’s high.
Efforts for a turnaround have begun. Management is removing debt from the balance sheet and there is hope for an eventual return to earnings growth. Investors today are looking at a beaten stock with an 11% dividend yield that could be a big winner a millionaire maker when Walgreens gets back on its feet.
But is that likely? Or has the industry passed Walgreens by?
Walgreens Boots Alliance is one of the world’s largest pharmacy companies. Ironically, the prescription drugs that consumers go to a Walgreens store (Boots in the UK) are simply the carrot to ingest. Pharmacies operate on razor-thin margins and make most of their profits by selling retail items, food and beverages as customers visit the stores. Walgreens generated nearly $116 billion in revenue from its U.S. pharmacies in 2024, but generated only $2.1 billion in operating income, a margin of 1.5%.
Competition from new sources, such as mail order and e-commerce threats, has put pressure on traditional pharmacies to expand their business models. For example, CFS health acquired health insurer Aetna in 2018. Walgreens chose to expand into healthcare services, an expensive and acquisition-intensive venture that ultimately increased its costs and balance sheet.
Now the company is aggressively trimming fat. Management is reducing its balance sheet and cutting costs by closing its least profitable stores:
Data source: Walgreens Boots Alliance.
The worst may soon be over. Walgreens earned $2.88 per share in 2024 and expected earnings to decline to $1.40 on the low end for 2025. However, analysts estimate that the company will grow earnings at an average annual rate of 5% over the next three to five years, signaling a bottoming out and return to earnings growth.
Assuming Walgreens grows profits again, the investment thesis is attractive at first glance.
Walgreens trades at a price-to-earnings ratio of about 6 and a PEG ratio of 1.1. In other words, the stock’s valuation is attractive for the company’s expected earnings growth. Investors could hypothetically expect Walgreens stock to deliver investment returns comparable to the company’s total earnings growth and dividend yield, about 16% annualized.
The dividend here is significant, as it would represent a significant portion of the stock’s hypothetical investment return. Companies determine the dividend amount, but the stock market determines the dividend yield. Remember that a stock’s dividend yield is a mathematical relationship between the dividend and the share price. Sky-high interest rates often indicate problems in the underlying activities. If the market had confidence in the dividend, the stock would likely trade at a higher price (and lower yield).
Walgreens’ struggles are well documented, so it’s fair to question the dividend. The current dividend per share of $1.00 is a whopping 70% of the company’s expected 2025 earnings. Additionally, analysts asked management about the dividend during the company’s Q4 earnings call in October, and they did not promise the current maintain payment.
Walgreens could be an interesting deep value stock idea if the company successfully gets back on track. But a stock that makes millionaires? Walgreens doesn’t seem to have that advantage.
The brick-and-mortar business model that Walgreens depends on is arguably outdated, allowing competitors to ship directly to consumers. Your neighborhood pharmacy probably won’t disappear completely anytime soon, but there’s a reason why Walgreens is closing unprofitable stores. The dividend appears ripe for a cut, especially as Walgreens tries to rebuild its financial position after rating agencies downgraded its credit to speculative (junk) status over the summer. A dividend cut would likely leave investors with sluggish growth and disappointing total returns.
As if that weren’t enough, reports have surfaced that Walgreens is considering selling itself to a private equity firm that wants to take the company private. A sale would likely require a premium to Walgreens’ current valuation. But given the company’s troubles, investors probably shouldn’t expect anything substantial that would deliver a big payout for shareholders.
Ultimately, this household name is probably better left in the trash than in your wallet.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
Is Walgreens Boots Alliance a Millionaire Maker? was originally published by The Motley Fool
