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Walgreens dividend cut: Is the falling WBA stock price putting hefty payout under pressure?

By Jenal Mehta

11:12, 30 September 2022

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In this article:
US500
US 500
3961.6 USD
30.3 +0.770%
WBA
Walgreen
40.93 USD
0.2 +0.490%
CVS
CVS
102.62 USD
0.31 +0.300%

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people shopping at a pharmacy
Walgreens has had perfect dividend payouts. The current market situation might change that. Photo - Getty Images

Shares of Walgreen Boots Alliance (WBA) shed almost 5% of its valuations this week as the company has been seeing deteriorating profits in recent sessions. Walgreen has a history of steady dividend pay-outs, investors worry this now might be under threat.

The drop in share value is double that of the broader market as compared to the S&P 500 (US500), which has dropped by only 2% in the past week.

Walgreen has had steady growth in the past five years and has managed to grow its dividend payout for the last 47 consecutive quarters.

Walgreen Boots Alliance (WBA) Price Chart

The tide has turned in the recent quarter however, where increasing market costs caught up with the revenues of the pharmacy. Walgreens posted much bleaker financial figures than its rival CVS (CVS).

The firm's failure to sell Boots at the start of the year has also has investors concerned at what this means for the financials.

However analysts believe that the company is likely to put Boots up for sale again, or even take up debt, before it will cut dividends and lose its near perfect pay-out streak.

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Income under pressure

Revenue in recent sessions For Walgreen (WBA) has seen a stagnant level of growth in its revenue although this might not have excited investors it was no cause for concern.

In the recent quarter however, revenue fell by 4.19%, net income lowered 75% and operating income lowered by a whopping 138%.

All businesses are of course facing the wrath of rising costs and Walgreens is no exception.

The concern comes in when you see Walgreens closest competitor, CVS (CVS) growing in all its income measures during the same time period

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CVS is the bigger of the two companies, and so had had the ability to diversify. It has worked with a firm called Aetna, to provide health insurance for customers and is also in the middle of HeathHubs which provide a range of medical services beyond pharmacy products.

CVS (CVS) Price Chart

Dividends might stay, but at a price

Companies are rarely willing to cut dividends due to the signal it sends to the markets. They are far more likely to alter share buybacks.

AJ Bell Investment Director Russ Mould said in a note “Buybacks are particularly subject to revision, as there is far less stigma when a management team quietly parks a programme compared to when a boardroom has to sanction a dividend cut.”

He says that this stigma may push the company to make unhealthy decisions “ There is also the risk that some firms buy back stock using debt, potentially weakening their balance sheets and competitive position in the long term.” He adds “the same danger lurks with dividends.”

At the moment Walgreen’s dividend cover is 3.3. A cover about 2 is considered healthy, indicating the company is able to sustain its pay-outs.

 

Boots

Instead of cutting dividends, Walgreens is more likely to take on aggressive cost cutting measures. This is seen in its attempt to divest Boots in mid-2022, which ultimately proved unsuccessful due to the current market conditions.

Danni Hewson AJ Bell financial analyst said “For a while it looked like Boots would be a tasty bone fought over by rival suitors and ultimately snapped up for a decent, if still rather low price. UK plc has been in the spotlight over the last couple of years as investors sought to cash in on post Brexit lows. But inflation has turned up the volume on whispers that recession is on the cards and lately they’ve become too loud for financial markets to ignore”

She suspects there might be a chance Boots might be up for sale again “It might have taken down the for sale sign but the u-turn will be an uncomfortable one, it’s hard to move forward when you’ve already mentally handed over the keys.”

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