Walgreens Boots Alliance (WBA) recently cut its dividend for the first time in nearly 50 years. While the cut shouldn’t come as a surprise to investors familiar with the company’s financial condition, it changes the calculus for income investors and could remove the stock from its prestigious place within the S&P 500 Dividend Aristocrats.
Before the dividend cut, Walgreens offered one of the highest yields in the market at more than 7.5%, attracting a lot of income-focused investors. The new 25 cent quarterly dividend cuts that yield in half to around 4%, which is still far higher than the S&P 500’s 1.5% average yield but well below the company’s historical 5% average yield.
Let’s take a look at what’s behind the dividend cut and why it might be a blessing in disguise for shareholders.
Behind the Curtains
Walgreens’ dividend cut may have captured the headlines, but it shouldn’t come as a surprise to investors following the company’s financial performance.
Walgreens has been struggling ever since its move into the value-based care segment with the acquisitions of VillageMD and CareCentrix. While integrating pharmacy and medical care might make sense long-term, the company has struggled to implement a unified business model and realize the synergies from these large acquisitions.
During the first quarter, the company reported adjusted earnings of $0.66 per share, which is down more than 43% from $1.16 per share during the same quarter last year. Meanwhile, free cash flow came in at negative $788 million, which represents a $671 million decrease compared to a year ago, thanks to lower earnings and phasing of working capital.
These financial results were slightly better than analysts expected, but the dropping dividend coverage ratio was a clear harbinger. The company was spending about $1.7 billion on its annual dividend (and rising with each dividend increase) despite generating less net income. So naturally, a dividend cut was inevitable to rein in the spending and boost cash flow.
A Worthwhile Trade-off
Walgreens may have been a popular name among income investors, but its poor stock performance has more than offset any dividend gains.
The company’s struggle to enter the value-based care market may be responsible for its recent troubles, but the stock has been a laggard for far longer. Over the past 20 years, Walgreens’ stock generated a total return of less than 1% (including capital gains and dividends), which significantly lags the S&P 500’s roughly 10% gain over the same timeframe.
Last October, the company announced plans to cut $1 billion in costs and close 60 VillageMD clinics to bolster its cash flow and set a more sustainable trajectory. The company also rolled out a new inventory system at its 9,000 stores to reduce excess inventory and free up working capital while leveraging micro-fulfillment centers to fill prescripts and free up staff.
These cost-cutting measures could help improve profitability, but that’s only half the equation. The company must also invest in sustainable growth initiatives to ensure it remains competitive with CVS Health Corporation (CVS) and other competitors. So, investors should be keen on the idea of reallocating capital from dividend payouts to growth initiatives.
Alternatives to Consider
Income investors seeking an alternative to Walgreens may want to look elsewhere in the S&P 500 Dividend Aristocrats ETF (NOBL) for ideas.
For example, Realty Income Corp. (O) is a popular dividend stock that has been trending higher since November 2023. As a REIT specializing in standalone locations for grocery stores, convenience stores, and drugstores, it offers an attractive 5% yield and has raised its dividend for more than 100 consecutive quarters! Its triple-net leases also pass on higher costs to its tenants.
Other Income-Focussed ETFs to Consider
You may also want to consider other income-focused ETFs for more diversification. These ETFs were selected based on their focus on generating income and low costs. They are sorted by their 1-year total return, which ranges from 2% to 24%. They have expenses between 0.06% and 0.69% and AUM between $110M and $79B. They are currently yielding between 2.2% and 9.4%.
| Name | Ticker | Type | Active? | AUM | 1-year Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| Capital Group Dividend Value ETF | CGDV | ETF | Yes | $3.84B | 24.2% | 2.3% | 0.33% |
| U.S. Diversified Real Estate ETF | PPTY | ETF | No | $113M | 11.4% | 3.8% | 0.53% |
| Vanguard Dividend Appreciation ETF | VIG | ETF | No | $78.8B | 11.3% | 2.2% | 0.06% |
| JPMorgan Realty Income ETF | JPRE | ETF | Yes | $310M | 9% | 3.5% | 0.69% |
| JPMorgan Equity Premium Income ETF | JEPI | ETF | Yes | $29.2B | 8% | 9.4% | 0.35% |
| iShares Cohen & Steers REIT ETF | ICF | ETF | No | $1.99B | 6.4% | 3.8% | 0.33% |
| First Trust Value Line Dividend ETF | FVD | ETF | No | $10.8B | 2.4% | 2.9% | 0.65% |
| Schwab U.S. Dividend Equity ETF | SCHD | ETF | No | $47.6B | 2.1% | 3.9% | 0.06% |
The Bottom Line
Walgreens’ dividend cut could jeopardize its status as a Dividend Aristocrat, but investors should applaud the move to invest in more sustainable growth. Meanwhile, the remaining 25 cent quarterly dividend is still generous by broader market standards, making the stock a potential income and turnaround opportunity for investors.
