When you look at Walgreens Boots Alliance‘s (Nasdaq: WBA) stock and see that it has a dividend yield of over 11%, you might think that it’s a great investment.
In fact, Walgreens has by far the largest dividend yield in the S&P 500. Even if the share price were to stay flat, you would net yourself a double-digit annual return without having to do anything.
However, as is the case with many high dividend yields, this one may be too good to be true.
Last year, Chief Income Strategist Marc Lichtenfeld reviewed Walgreens and gave it a “D” for dividend safety, meaning there was a high probability of a dividend cut.
He cited Walgreens’ drop in free cash flow in 2022 and 2023 as the main culprit.
He also noted that the company’s payout ratio was over 1,200%. This means that the company’s total dividend payout was 12 times more than the amount of cash that it brought in.
The only silver lining was that the company was expected to bounce back after a rough 2023 and grow its free cash flow in 2024.
Today, since we’re nearing the end of 2024, I thought it’d be a good time to see whether the company has turned things around. (Also, thank you to Wealthy Retirement reader Travis, who commented on a recent article to ask us to evaluate Walgreens’ dividend. If you have a stock you’d like us to take a look at, leave a comment below.)
I want to answer two questions today: Did Marc’s “D” grade accurately assess Walgreens’ dividend safety, and what is the risk of a cut this year?
First things first, let’s see whether Marc was right in predicting a dividend cut.
When Marc wrote his article last year, Walgreens’ dividend was at $0.48 a share.
Lo and behold, less than three months later, the company slashed the dividend nearly in half to $0.25 a share.
I call that a win for Safety Net.
That reduction also bumps this year’s grade down a level… but there are plenty of other factors that could make up for it, including free cash flow.
Last year’s free cash flow estimates showed that Walgreens had a chance to bounce back, but as we can see in the graph below, that did not happen.
All I can say is “Yikes!” This year’s free cash flow was a catastrophe.
For 2024, Walgreens’ free cash flow was -$363 million. (Its 2024 fiscal year ended in August.) Even if the company were to right the ship in 2025, estimates for next year are still in the negative at -$32 million.
Finally, we must address the company’s dividend payout ratio.
Our normal calculation won’t work because of the negative free cash flow figure.
Walgreens’ 1,200% payout ratio in 2023 was bad – and just a bit higher than our threshold of 75%. Since the payout ratio is now negative, it’s even worse than bad.
The company is continuing to pay out dividends while it’s hundreds of millions of dollars in the hole. That’s the definition of unsustainable.
If I could bump the stock down more than one grade, I would, but I have to follow the rules. So I’ll only knock it down one notch.
This year, Walgreens had negative growth, boasted an awful dividend payout ratio, and cut its dividend – and it probably slashed my tires for good measure.
I can confidently say that this dividend is very unsafe.
Dividend Safety Rating: F
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