Walgreens Boot Alliance(NASDAQ: AMB) is a well-known name in the healthcare industry. Consumers in the United States and around the world have frequented their neighborhood pharmacies for generations.
However, the company has fallen on difficult times. Clumsy efforts to expand the business ruined the balance sheet and caused a 90% drop from the stock’s peak.
Recovery efforts have begun. Management is trimming debt from the balance sheet and there are hopes for an eventual return to earnings growth. Investors are looking at a beaten stock with an 11% dividend yield today that could be a big winner, maybe a millionaire manufacturer if Walgreens recovers.
But is that likely? Or has the industry overlooked Walgreens?
Walgreens Boots Alliance is one of the largest pharmaceutical companies in the world. Ironically, the prescription drugs that consumers take to a Walgreens store (Boots in the UK) are simply the carrot to get them in the door. Pharmacies work on razor-thin margins and make most of their profits by selling retail products, food and drinks while customers visit the stores. Walgreens generated nearly $116 billion in revenue at its U.S. pharmacies in 2024, but only made $2.1 billion in operating income, a 1.5% margin.
Competition from new sources, such as threats from mail order and e-commerce, has pressured traditional pharmacies to expand their business model. For example, CVS Health acquired health insurance giant Aetna in 2018. Walgreens opted to expand into care services, a costly and acquisition-intensive initiative that ultimately increased its costs and bottom line.
Now, the company is aggressively trimming fat. Management is deleveraging the balance sheet and cutting costs by closing its least profitable stores:
Data source: Walgreens Boots Alliance.
The worst could happen soon. Walgreens earned $2.88 per share in 2024 and was on track to decline in earnings in 2025 to $1.40 on the low end. However, analysts estimate that the company will grow its earnings by an average of 5% annually over the next three to five years, indicating a minimal touch and a return to earnings growth.
Assuming Walgreens grows profits again, the investment thesis is attractive at first glance.
Walgreens trades with a forward 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. Hypothetically, investors could expect Walgreens stock to generate investment returns on par with the company’s overall earnings growth and dividend yield, about 16% annualized.
The dividend is significant here as it would represent a sizable portion of the stock’s hypothetical investment returns. Companies set the amount of the dividend, but the stock market sets the dividend yield. Remember, a stock’s dividend yield is a mathematical relationship between its dividend and the share price. Sky-high returns often indicate problems in the underlying business. If the market relied on the dividend, the stock would likely trade at a higher price (and a lower yield).
Walgreens’ struggles are well documented, so it’s fair to question the dividend. The current dividend per share of $1 represents up to 70% of the company’s expected earnings through 2025. Additionally, analysts asked management about the dividend on the company’s fourth-quarter earnings call in October, and it didn’t. They agreed to maintain the current payment.
Walgreens could be an interesting idea for a great value stock if the company successfully gets back on track. But a million-dollar action? Walgreens doesn’t seem to have that advantage.
The traditional business model that Walgreens depends on is arguably outdated, and competitors can ship directly to consumers. Your neighborhood pharmacy probably won’t be completely gone anytime soon, but there’s a reason Walgreens is closing unprofitable stores. The dividend appears ripe for a reduction, especially as Walgreens attempts to repair its finances after rating agencies downgraded its credit to 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 emerged that Walgreens is considering selling itself to a private equity firm that would take the company private. A sale would likely require a premium to Walgreens’ current valuation. But given the company’s difficulties, investors probably shouldn’t anticipate anything substantial that could result in a big reward for shareholders.
When all is said and done, it’s probably better to leave this well-known name 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 million-dollar manufacturer? was originally published by The Motley Fool
