Walgreens Boots Alliance (WBA) stock was one of the worst-performing S&P 500 stocks on Friday, January 31, after the drugstore chain announced it is suspending its quarterly dividend.
"This change in capital allocation is aimed at strengthening WBA's balance sheet by reducing debt over time and improving free cash flow, as the company works toward achieving a retail pharmacy-led turnaround underpinned by a sustainable economic model," Walgreens said in a statement.
The company added that its "cash needs over the next several years," which includes litigation and debt refinancing, "were important considerations as part of the decision to suspend the dividend."
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The move comes just three weeks after Walgreens beat top- and bottom-line expectations for its fiscal 2025 first quarter and maintained its full-year profit forecast.
However, based on Walgreens' forecast for full-year earnings of $1.40 to $1.80 per share, its 25 cents per share quarterly dividend would have resulted in a full-year payout ratio [how much it costs a company to pay its dividend as a percentage of earnings] of 55.6% to 71.4%. And this would not be a prudent use of capital in a turnaround situation.
Walgreens did not provide any indication as to if or when the dividend would be reinstated.
Is Walgreens stock a buy, sell or hold?
Walgreens Boots Alliance's struggles have extended to the price charts, as well, with shares of the former Dow Jones stock down roughly 60% in the past 12 months. Unsurprisingly, Wall Street is on the sidelines when it comes to the consumer discretionary stock.
According to S&P Global Market Intelligence, the average analyst target price for WBA stock is $12.35. While this represents implied upside of more than 20% to current levels, it's more likely a case of analysts failing to keep up with the falling share price vs expectations for a major rally. Meanwhile, the consensus recommendation is Hold.
Financial services firm UBS Global Research is one of those with a Neutral rating (equivalent to a Hold) on WBA stock, along with an $11 price target.
"A [dividend] cut was widely anticipated by investors given depressed cash flow, elevated leverage, and limited balance sheet flexibility barring a sale of assets," says UBS Global Research analyst Kevin Caliendo. The company will save roughly $86 million by suspending its dividend, "which will likely be used to manage near-term working capital needs, pay down near-term debt, and potentially fund improvements into the core business," he notes.
Caliendo adds that the dividend cut may also indicate that a potential buyout or large asset sale will not occur in the near term.
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