Shares of Walgreens Boots Alliance(NASDAQ: WBA) they were up 27.5% on Friday, January 10, 2024. That’s not nearly enough to recover from the stock’s 64% drop last year, but it’s a big step in the right direction.
Investors of all stripes are wondering if there could be more gains for the failed operator of the retail pharmacy chain. Income-seeking investors are particularly interested because, despite recent gains, shares of Walgreens Boots Alliance are offering a whopping 8.5% dividend yield.
Can shares of Walgreens Boots Alliance continue to rise, or should investors use the stock’s recent gains as an exit opportunity? Let’s take a look at what the pharmacy chain operator said in its latest report to see if it’s time to buy, sell or hold ultra-high-yielding dividend stocks.
During the first fiscal quarter ended November 30, 2024, adjusted earnings were $0.51 per share. That’s less than half the amount it was earning a few years earlier, but well above Wall Street’s consensus estimate of just $0.40 per share.
In addition to a better-than-expected fiscal first quarter, Walgreens issued forward-looking guidance that was slightly rosier than expected. While the average analyst expected the company to forecast earnings to reach $1.58 per share in fiscal 2025, management posted a guidance range of between $1.40 and $1.80 per share.
Citing the surprisingly good results of its retail business, Evercore analyst Elizabeth Anderson raised her price target on the bank to $12 from $9 per share. The adjustment is a step in the right direction, but the new target is not far from the stock’s closing price of $11.75 on January 10.
Anderson and her peers have been surprised by Walgreens’ recent results, but the company has done little to address the major issues weighing on the retail drug industry as a whole. According to a Federal Trade Commission report, the pharmacy benefit management (PBM) operations of only three companies, CVS Health, UnitedHealth Groupand Cignahandles 79% of prescription drug claims for 270 million Americans.
All three major PBMs are vertically integrated with managed care providers and mail order pharmacies. After seeing the providers mentioned, many of their members get prescriptions from mail order pharmacies run by the same company that collects their insurance premiums. Walgreens does not have an integrated PBM, and its US pharmacy business is suffering as a result.
Cheap generic drugs were once a great source of income for retail pharmacies. Unfortunately for Walgreens, the growing popularity of Mark Cuban’s Cost Plus Drugs and its transparent business model have made generic drug dispensing a low-margin business. In order to compete with low-cost service providers, such as Amazon Pharmacy and Cost Plus Drugs, CVS Health recently converted its commercial pharmacy contracts to a similar model it calls CostVantage.
Despite pressure from pharmacies that are vertically integrated with health insurers, Walgreens reported that its US retail pharmacy sales rose 6.6% year-over-year in the first fiscal quarter. While sales of this important segment are growing, margins have fallen again. Adjusted operating income from U.S. retail operations was just 1.3% of sales, sharply lower than the 4% margin the company reported two years earlier.
Declining U.S. pharmacy margins could be a big problem as Walgreens’ fledgling U.S. healthcare segment is still bleeding cash. The company’s US healthcare operation lost $325 million in the first fiscal quarter, bringing the total operating loss to $245 million for the three-month period.
A dividend yield of over 8% is attractive at the moment. However, without any profits to distribute, another deep dividend cut could be in this stock’s future. It’s probably best to watch from the sidelines until the bottom line is firmly in positive territory again.
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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. Cory Renauer holds positions at Amazon and CVS Health. The Motley Fool has positions in Amazon and recommends it. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
