Dividend cuts and suspensions can often come without warning. While investors may have suspicions about whether a company will make a change to its dividend, there’s no sure-fire formula for determining when that might actually happen.
But there are certainly warning signs that can help investors gauge the overall risk. When Intel (NASDAQ: INTC) announced that it was suspending its dividend in August, it may have caught income investors off guard. However, given the company’s aggressive growth strategy and its poor financials, a reduction or suspension of the dividend shouldn’t have been all that unexpected — the writing was on the wall.
That’s how I feel about another stock right now: Walgreens Boots Alliance (NASDAQ: WBA).
Walgreens could follow in Intel’s footsteps
Pharmacy retailer Walgreens isn’t making chips, but it does have a costly growth strategy of its own, which includes getting deeper into healthcare with the launch of hundreds of primary care clinics. That has been happening as the company faces growing competition from online retail giant Amazon, which has made it easier for patients to order pills and have them delivered right to their door. Rather than going to your local Walgreens, you can have Amazon deliver medications to you — in some markets, it can be delivered the same day as your order.
Given the competition and the vast need for cash to grow its healthcare business, Walgreens is in a troubling situation. There are signs that the business may be looking to take drastic measures under new CEO Tim Wentworth. He already slashed the company’s dividend earlier this year, and Walgreens is still reportedly looking at asset sales to help free up some cash flow.
There are even rumors that Walgreens may dump its entire stake in primary care company VillageMD, which has long been key to its healthcare strategy. Such a move would suggest a drastic change in the company’s overall growth strategy. If Walgreens is considering that kind of a move, then another dividend cut or outright suspension of the payout is likely on the table as well.
Where Walgreens differs from Intel
Unlike Intel, which seems to be poised to build out its foundry business, Walgreens appears to have a more questionable future ahead — and there may be more cards it’s willing to play than slashing or suspending its dividend. From selling businesses to reducing its store count, there are many different levers the company could pull, which could help strengthen its financials and potentially avoid the possibility of suspending its dividend, which today yields close to 10%.
With a new CEO who is willing to consider all options, there’s hope that Walgreens can still find a way to turn things around, but it certainly won’t be easy. The business is struggling to grow, and its margins have been unimpressive, to say the least.
Investors shouldn’t rely on Walgreens’ dividend
For decades, Walgreens was a top dividend growth stock. That changed this year with the reduction of its dividend. This is no longer a stock that investors should feel comfortable with for its dividend. Walgreens is more than just a risky stock; this is a business with a largely uncertain future ahead. As a result, income investors should consider looking elsewhere for a good dividend.
At this stage, Walgreens can make for a risky contrarian option, but not much else. It’s a turnaround play that can possess a lot of upside if Wentworth is able to pull off a huge transformation of the business. But it won’t be easy, and at the very least, it can be an extremely bumpy ride for investors.
The days of Walgreens being seen as a safe stock to own are long over, and its lower valuation doesn’t change that fact. Unless you have a high risk tolerance, you’re better off going with other stocks instead.
Should you invest $1,000 in Walgreens Boots Alliance right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Intel and recommends the following options: short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Intel Suspended Its Dividend, and This Stock Could Be the Next One to Halt Its High-Yielding Payout was originally published by The Motley Fool
