Is Walgreens Boots Alliance Stock a Smart Investment Now?
Understanding Walgreens Boots Alliance and Its Current Market Position
If you've been exploring the stock market for high-yield dividend opportunities, you might be intrigued by Walgreens Boots Alliance (NASDAQ: WBA). This company is not just any player in the market; it is sought after, especially in discussions surrounding dividend stocks.
Following a notable adjustment this year, the chain reduced its quarterly dividend payout to $0.25. Despite the cut, the stock price has remained below $10 per share—presenting a potentially impressive dividend yield for new investors who hop on board at these prices.
While purchasing stocks that are currently out of favor can provide lucrative returns, there's a fine line to walk. Investing in stocks that face sharp declines can lead to significant losses, as we’ll explore with Walgreens Boots Alliance.
Current Challenges Facing Walgreens Stock
It is crucial to understand the landscape Walgreens is contending with. From the conclusion of 2023 to the end of August, shares of Walgreens experienced a staggering drop of approximately 64.6%. The company’s significant struggle stems from the increasing pressure that retail pharmacy chains face from online competitors and pharmacy benefits managers (PBMs).
During its fiscal third quarter, Walgreens recorded a modest 2.3% sales growth within its U.S. pharmacy segment. However, the gains have come at a cost; the adjusted operating income plummeted by 47.9%, which indicates the sharp decline in profitability when filling prescriptions.
Interestingly, three major PBMs control around 80% of all U.S. filled prescriptions. They also own mail-order and specialty pharmacies that give them competitive leverage against Walgreens. Notably, CVS Health, a leading player in the space, operates its retail chain and directly competes with Walgreens, which does not have an affiliated PBM.
Assessment of Walgreens’ Strategic Moves
In addition to the issues stemming from its pharmacy business, Walgreens has attempted to pivot towards becoming a notable healthcare service provider through its VillageMD partnership with Cigna. Unfortunately, this venture has not gone as planned.
In a push to extend its reach, VillageMD acquired Summit Health-CityMD for $8.9 billion. However, this resulted in a staggering impairment charge of $12.4 billion—over $5 billion of which Walgreens had to absorb. Thus far in fiscal 2024, this segment reported an adjusted operating loss of $151 million.
Amidst these challenges, a recent review showed that 75% of Walgreens' U.S. locations are vital in contributing to the healthcare segment's profits, suggesting potential for improved returns through operational adjustments.
Paving a Way Forward for Walgreens
Despite the complexities of trying to navigate PBMs and the challenges of its current business model, there is a glimmer of hope for Walgreens. Intriguing developments are brewing in the form of possible changes within the PBM industry that could level the playing field.
The Federal Trade Commission (FTC) issued a report that raises considerable concerns about the PBM’s practices, hinting at potential legal actions. If the FTC were to successfully implement changes, it could reshape competitive dynamics favorably for Walgreens.
The company is actively targeting profitability in its U.S. healthcare segment and has made strides by narrowing its adjusted operating loss to $22 million in the fiscal third quarter—a stark contrast to the much larger losses recorded in prior periods.
Evaluating the Investment Opportunity in Walgreens
As Walgreens' stock trades at a fraction of its potential earnings, some investors might see this as a prime opportunity. Currently, the stock is valued at just 3.2 times the average of its lowered earnings outlook, indicating a steep discount that could appeal to value-seeking investors.
However, prospective investors should tread cautiously. During a recent conference call, CEO Tim Wentworth acknowledged that the existing pharmacy model remains unsustainable. While swift governmental reforms could be beneficial, it remains uncertain when—or if—those will occur. For those looking for consistent income, it might be wise to take a step back and observe the company’s evolution in the market.
Should You Bet on Walgreens Boots Alliance Right Now?
Before making any investment, it's essential to weigh the risks involved. With its recent performance and strategic pivot, Walgreens Boots Alliance certainly presents an intriguing case for investment.
Frequently Asked Questions
What are the current challenges facing Walgreens Boots Alliance?
Walgreens is under pressure due to competition from online retailers and pharmacy benefits managers, affecting its sales and profitability.
How has Walgreens adjusted its dividend policy?
This year, Walgreens reduced its quarterly dividend payout to $0.25, reflecting its attempts to navigate financial challenges.
What is Walgreens’ strategy for future growth?
The company is focusing on improving profitability within its healthcare segment and exploring potential changes to PBM industry regulations.
Is Walgreens a good investment option now?
While its stock is currently undervalued, investments come with inherent risks, and a cautious approach is recommended.
Who is Walgreens' primary competitor?
CVS Health is the leading competitor in the retail pharmacy sector, operating both a significant retail chain and PBMs.
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