Walgreens Shoe Alliance (Nasdaq: WBA) is a household name in the healthcare industry. Consumers in America and around the world have been going to their neighborhood pharmacies for generations.
However, the company fell on hard times. Clumsy efforts to expand the business weakened the balance sheet and caused a 90% decline from the stock’s high.
Transformation efforts have begun. Management is reducing debt from the balance sheet, and there is hope of an eventual return to earnings growth. Investors are eyeing a beaten-down stock with an 11% dividend yield today that could be a big winner, perhaps Millionaire maker If Walgreens gets back on its feet.
But is this possible? Or has the industry outgrown Walgreens?
Walgreens Boots Alliance is one of the largest pharmacy companies in the world. Ironically, prescription drug consumers who go to Walgreens (Boots in the UK) are simply the carrot that helps them get in the door. Pharmacies operate on razor-thin profit margins, making most of their profits by selling retail goods, food and beverages while customers visit the stores. Walgreens generated approximately $116 billion in operating revenue at its U.S. pharmacies in 2024, but generated only $2.1 billion in operating income, a 1.5% margin.
Competition from new sources, such as mail order and e-commerce threats, has put pressure on traditional pharmacies to expand their business model. For example, CVS Health Walgreens acquired health insurance giant Aetna in 2018. Walgreens chose to expand into care services, an expensive and acquisition-laden endeavor. Eventually its costs and balance sheet ballooned.
Now, the company is aggressively cutting fat. Management is shrinking the balance sheet and cutting costs by closing its less profitable stores:
The worst may be over soon. Walgreens has earnings of $2.88 per share in 2024 and is targeting 2025 earnings to fall to $1.40 at the low end. However, analysts estimate that the company will grow its earnings at a rate of 5% annually over the next three to five years, suggesting it has hit a bottom and a return to earnings growth.
Assuming Walgreens grows profits again,… Investment thesis Attractive on the surface.
Walgreens trades with a forward P/E 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. Investors could theoretically expect Walgreens stock to generate investment returns on par with the company’s total earnings growth and dividend yield, about 16% per year.
Dividends are big here because they will represent a large portion of the stock’s hypothetical investment returns. Companies determine the amount of dividends But the stock market determines the dividend yield. Remember, a stock’s dividend yield is a mathematical relationship between its earnings and the stock price. High returns often indicate a problem with the underlying business. If the market is confident about the dividend, the stock will likely trade at a higher price (and a lower yield).
Walgreens’ struggles have been well documented, so it’s fair to question the profits. The current dividend per share of $1.00 amounts to 70% of the company’s 2025 earnings guidance. Additionally, analysts asked management about the dividend in the company’s Q4 earnings call in October, and they did not commit to maintaining the current payout.
Walgreens could be an interesting idea for a deep value stock if the company manages to get back on track. But millionaire-making stocks? Walgreens doesn’t seem to have that upside.
Walgreens’ actual business model is arguably outdated, with competitors able to ship directly to consumers. Your neighborhood drugstore probably won’t completely disappear anytime soon, but there’s a reason Walgreens is closing unprofitable stores. Earnings appear poised for a cut, especially as Walgreens attempts to repair its finances after rating agencies downgraded its credit rating to speculative (junk) status over the summer. A dividend cut will likely result in slower growth for investors 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 expect anything substantial that would create a significant return for shareholders.
When all is said and done, it’s better to leave this famous name in the trash than in your wallet.
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Justin Pope He has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has Disclosure policy.
Is Walgreens Boots Alliance a millionaire maker? Originally published by The Motley Fool