Despite a bruising September sell-off, most major stock market indices are still in positive year-to-date territory after a massive run higher to start 2023. Even the Dow Jones Industrial Average ($DOWI) is still clinging to a 1.5% gain for the year, even though it didn't quite manage the same record-setting first-half returns as the tech-focused Nasdaq Composite ($NASX). However, there is one underperforming Dow component that's weighing heavily on the index's overall returns.
Shares of Walgreens Boots Alliance (WBA) are down are down more than 40% year-to-date, and have slumped 31% in the last 52 weeks. WBA is the worst-performing Dow stock of 2023 by a wide margin, and has burned massive investor wealth in the past decade.
While the broader Dow has returned 176% in the last 10 years, after adjusting for dividends, WBA is down 47% over this same period. Given that share prices and dividend yields are inversely related, Walgreens Boots currently offers shareholders a relatively high forward yield of 9%.
After heavy losses for WBA, let’s see if this large-cap, high-yield stock is worth adding to your equity portfolio right now - or if there's more downside yet to come.
Why is WBA Down?
Valued at a market cap of $18.24 billion, Walgreens Boots Alliance operates as a health and beauty retail company. It sells prescription drugs as well as retail products in verticals such as health, wellness, beauty, personal care, and general merchandise through its vast network of retail drugstores.
Walgreens Boots Alliance has over 13,000 locations in the U.S., Europe, and Latin America and is a key player in multiple healthcare ecosystems. It now aims to gain traction in the tech-enabled pharmacy operating model by enhancing its digital and telepharmacy capabilities. However, entering new markets might lead to a strain on profit margins in the near term, which might make investors nervous.
Already, a key reason for WBA's underperformance is its deteriorating financials and weak balance sheet. During its fiscal third-quarter earnings report in June, the retailer fell short of earnings expectations, and slashed its full-year guidance on softer consumer spending and weaker demand for COVID vaccines.
Digging deeper, the company’s free cash flows have declined from $6.89 billion in fiscal 2018 to $2.16 billion in fiscal 2022 (ended in August). In the last 12 months, its sales were up just 1% year over year to $136 billion, while its debt load has more than doubled to $38 billion in the past five years.
Its rising debt has coincided with a period of rising interest rates, and the company burned through nearly $545 million in cash in the last quarter. Walgreen Boots ended fiscal Q3 with just $970 million in cash.
More recently, WBA shares tumbled to start September after the company announced the departure of CEO Rosalind Brewer - suggesting the retailer's planned shift toward a more healthcare-oriented strategy isn't playing out quite as intended.
What's Next for Walgreens Boots Alliance?
Walgreens Boots pays shareholders a quarterly dividend of $0.48, and these payouts have risen by 4.4% annually in the last 10 years. To support its current dividend yield, WBA needs to earn at least $414 million in free cash flow each quarter. However, after adjusting for acquisition-related payments, it reported a free cash outflow of over $400 million in Q3. Going forward, the drugstore chain's dividend could very well be at risk.
Analysts have a tepid outlook on WBA. Out of the 15 analysts covering WBA, two recommend “strong buy,” 11 recommend “hold,” one recommends “moderate sell,” and one recommends “strong sell.” However, the average target price for WBA is $33.15, which is a steep 58% premium to current levels.
Meanwhile, analysts tracking WBA expect its adjusted earnings per share to fall from $5.04 in fiscal 2022 to $3.78 in fiscal 2024, which is a significant decline.
While WBA certainly trades at a reasonable price-to-earnings multiple of 5.6x, its narrowing profit margins, declining cash flows, and strategic hiccups all make it a high-risk investment today. For now, this is one “cheap” stock to avoid.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
