Walgreens Boots Alliance(NASDAQ: WBA) is a household name in the healthcare industry. Consumers in America and worldwide have frequented their neighborhood pharmacies for generations.
However, the company has fallen on hard times. Clumsy efforts to expand the business scuttled the balance sheet and triggered a 90% decline from the stock’s high.
The turnaround efforts have started. Management is slashing debt from the balance sheet, and there’s hope for an eventual return to earnings growth. Investors are looking at a beaten-down stock with an 11% dividend yield today that could be a big winner, perhaps a millionaire maker if Walgreens gets back on its feet.
But is that likely? Or has the industry passed Walgreens by?
Walgreens Boots Alliance is one of the world’s largest pharmacy companies. Ironically, the prescription drugs consumers go to a Walgreens (Boots in the United Kingdom) store for are simply the carrot to get them in the door. Pharmacies work on razor-thin margins, making most of their profits by selling retail goods, food, and beverages while customers visit the stores. Walgreens generated almost $116 billion in revenue at its U.S. pharmacies in 2024 but made just $2.1 billion in operating income, a 1.5% margin.
Competition from new sources, such as mail-order and e-commerce threats, has pressured traditional pharmacies to expand their business model. For example, CVS Health acquired health insurance giant Aetna in 2018. Walgreens opted to expand into care services, an expensive and acquisition-heavy endeavor that ultimately ballooned its costs and balance sheet.
Now, the company is aggressively trimming fat. Management is deleveraging the balance sheet and cutting costs by closing its least-profitable stores:
Data source: Walgreens Boots Alliance.
The worst might soon be over. Walgreens earned $2.88 per share in 2024 and guided for a decline in 2025 earnings to $1.40 on the low end. However, analysts estimate the company will grow earnings by an average of 5% annually over the next three to five years, signaling a bottoming and return to earnings growth.
Assuming Walgreens does grow earnings again, the investment thesis is appealing at face value.
Walgreens trades at 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 hypothetically expect Walgreens stock to deliver investment returns on par with the company’s total earnings growth and dividend yield, about 16% annualized.
The dividend is significant here since it would account for a considerable portion of the stock’s hypothetical investment returns. Companies set the dividend amount, but the stock market sets the dividend yield. Remember, a stock’s dividend yield is a mathematical relationship between its dividend and share price. Sky-high yields often signal trouble in the underlying business. If the market were confident in the dividend, the stock would likely trade at a higher price (and lower yield).
Walgreens’ struggles are well documented, so it’s fair to question the dividend. The current dividend per share of $1.00 is as high as 70% of the company’s guided earnings for 2025. Additionally, analysts asked management about the dividend on the company’s Q4 earnings call in October, and they didn’t commit to maintaining the current payout.
Walgreens could be an interesting deep value stock idea if the company successfully gets back on track. But a millionaire-making stock? Walgreens doesn’t seem to have that upside.
The brick-and-mortar business model Walgreens depends on is arguably outdated, with competitors able to ship directly to consumers. Your neighborhood pharmacy probably won’t disappear completely anytime soon, but there’s a reason Walgreens is closing unprofitable stores. The dividend seems ripe for reduction, especially with Walgreens trying to repair its financials after rating agencies downgraded its credit to speculative (junk) status over the summer. A dividend cut would likely leave investors with slow growth and disappointing total returns.
As if that weren’t enough, reports have surfaced that Walgreens is considering selling itself to a private equity firm that would take the company private. A sale would probably require a premium to Walgreens’ current valuation. But given the company’s struggles, investors probably shouldn’t anticipate anything substantial that would create a big payoff for shareholders.
When it’s all said and done, this well-known name is probably better left on the trash heap than in your portfolio.
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