When you check out Walgreens Boots Alliance’s (Nasdaq: WBA) stock and notice its dividend yield is over 11%, it might seem like a fantastic investment opportunity.
Walgreens boasts the highest dividend yield in the S&P 500. So, even if the share price doesn’t budge, you’d still enjoy a double-digit annual return without lifting a finger.
However, as with many high dividend yields, it might just be too good to last.
Last year, Marc Lichtenfeld, a Chief Income Strategist, examined Walgreens and rated it a “D” for dividend safety, signaling a strong likelihood of a dividend cut.
Marc pointed out the dip in Walgreens’ free cash flow over 2022 and 2023 as the main reason for concern.
Additionally, he commented on the company’s alarming payout ratio, which was over 1,200%. This meant their total dividend payout was 12 times more than the cash they were bringing in.
The slight silver lining was that following a tough 2023, projections hinted at Walgreens potentially recovering and growing its free cash flow in 2024.
Now, as we near the end of 2024, it’s time to assess whether Walgreens has managed to turn things around. Also, a shoutout to Travis, a reader from Wealthy Retirement, who recently asked us to analyze Walgreens’ dividend. If there’s another stock you’re curious about, feel free to leave a comment below.
Today, I’m tackling two main questions: Did Marc’s “D” grade accurately predict Walgreens’ dividend safety? And what’s the risk of another cut this year?
Let’s start by verifying whether Marc was correct in foreseeing a dividend cut.
Back when Marc penned his article last year, Walgreens was offering a dividend of $0.48 per share.
Sure enough, in under three months, Walgreens drastically reduced the dividend to $0.25 per share.
That’s a successful call for our Safety Net.
While that cut would typically lower this year’s grade, other elements, like free cash flow, could counterbalance it.
Yet, the previous year’s free cash flow estimates suggested a potential recovery for Walgreens, but the current data tells a different story.
All I can say is “Wow!” This year’s free cash flow performance was disastrous.
In 2024, Walgreens recorded a free cash flow of -$363 million. (Their fiscal year wrapped up in August.) Even if they manage a recovery in 2025, current projections still show a negative figure at -$32 million for next year.
Next, we should discuss the company’s dividend payout ratio.
Since the company is in negative free cash flow territory, our regular calculation approach doesn’t apply.
The payout ratio of Walgreens in 2023 was already startling at over 1,200%—a far cry from our 75% standard. With a current negative payout ratio, things only look grimmer.
Continuing to pay dividends while being so financially underwater is outright unsustainable.
If I could drop the stock by more than one grade, I would, but fair is fair. So, I’ll lower it just one step.
This year, Walgreens showed negative growth, exhibited an atrocious dividend payout ratio, and cut its dividend—each factor a blow to its standing.
I am quite certain this dividend is very unsafe.
Dividend Safety Rating: F
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