Walgreens Boots Alliance (NASDAQ:WBA) is a former Dividend Aristocrat that had a 92-year history of paying dividends. Equally impressive was its record of raising the payout for 48 consecutive years before it slashed it 48% to kick off 2024.

Now the pharmacy chain announced it was suspending its dividend in a bid to strengthen its balance sheet by reducing its debt and improving its free cash flow. The stock plunged over 10% on the news.

With WBA stock trading at just tiny fractions of its value, is now the time to buy in or should investors avoid Walgreens altogether? Let’s dig in to find out.

A necessary evil

Walgreens has been on a long, steady decline for years. It is one of the largest retail pharmacies in the country with some 8,000 locations. Almost three-quarters of the country lives within five miles of one. 

Yet from its high point 15 years ago, the drugstore chain’s performance has been dismal. It has a total return of negative 84%, an outrageous destruction of shareholder value. For a company bleeding out like this, maintaining the dividend was no longer possible. 

CEO Tim Wenworth took over in October 2023 and immediately prioritized cost-cutting. The near-halving of the dividend last year and its elimination just now, were a long overdue tourniquet that needed to be applied.

Although on the surface Walgreens dividend appeared safe, with a free cash flow payout ratio before the first cut of 44%, profits margins continued to deteriorate as prescription reimbursements were consistently under pressure.

It also became clear it could no longer justify its sprawling retail footprint, making the decision to close 1,200 underperforming stores by 2027 a necessity.

It is essential for Wentworth to get Walgreens’ bloated coast structure under control, but it also threatens the timeline of the company’s turnaround plan.

A business on the mend

The current retail environment remains difficult for Walgreens. Despite inflation and interest rates easing, cash-strapped consumers are still being careful about where and how they spend their money. 

Yet the latest quarter showed some resilience in Walgreens’ business. Total first quarter sales were up 7.5% to $39.5 billion with U.S. retail pharmacy revenue rising 6.6% to $30.9 billion. Comparable sales climbed sharply, jumping 8.5% from the year-ago period. 

Comparable prescription volumes were also up even though the start of winter was delayed, which caused fewer respiratory incidences and store visits. Walgreens, though, has maintained its market share regardless.

Investors have had their hopes about Walgreens dashed several times over the past year. First, the chain had planned on shedding the U.K. Boots Alliance business, but then decided not to. Then in December, Walgreens was reportedly in talks with private equity firm Sycamore Partners over taking the company private, but they quickly fell through. Walgreens is going to have to slog through its turnaround on its own.

Key takeaway

There are numerous examples of companies that cut or halted their dividend payments and were able to recover. 3M (NYSE:MMM), for example, was another Dividend Aristocrat that was also stuck in a terminal slide lower before halving its payout last May. Since then, the industrial conglomerate has returned 55% for investors.

Walgreens has it in it to do the same. The Boots Alliance business is a solid performer and the VillageMD practice still holds promise. Walgreens had been doing better even though the market didn’t appreciate its quarterly results last month.

Walgreens Boots Alliance could make for a good investment for those with a long-term mindset, particularly at these prices.

WBA stock goes for less than 7 times next year’s earnings estimates, a miniscule fraction of its sales, and trades for a small percentage of its book value. It also trades at slightly more than the cash it has on its balance sheet.

Don’t expect a quick u-turn, but Walgreens is a beaten down ex-Aristocrat that could surprise the market over the long run. 

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