Why is Walgreens Stock So Cheap, and Should You Invest for Its 11% Dividend Yield?

With a YTD loss of about 66%, Walgreens Boots Alliance (WBA) is the worst-performing S&P 500 Index($SPX) stock of 2024. In absolute terms, it trades below $10 – marking the first time the stock has traded in single digits since 1996. Simply put, WBA stock hasn’t delivered any returns in the form of capital appreciation for 28 long years.

One saving grace has been its dividends, with the current dividend yield at almost 11.5% - which, for context, is the highest among all S&P 500 Index constituents. 

Why is Walgreens stock so low, and is the stock a buy for its fat dividend yield? We’ll discuss in this article.

Walgreens Went Public in 1927

Walgreens went public almost a century ago, in 1927, and in 1934 it was listed on the New York Stock Exchange (NYSE). In 2012, Walgreens acquired a 45% stake in Alliance Boots, and 2 years later it exercised the options to fully integrate the company - which led to the creation of Walgreens Boots Alliance.

In 2018, WBA was added to the Dow Jones Industrial Average ($DOWI), and earlier this year, it was replaced in the Dow by Amazon(AMZN) as part of a rebalancing. WBA's Dow tenure was among the shortest in history, and while other factors could have played a part, its removal from the 30-share price-weighted index was also likely due to its low stock price.

Why is Walgreens Stock So Low?

At times, stock prices are low due to splits. However, in WBA's case, the last split was way back in 1999. 

The simple reason Walgreens stock is so low is because of its falling stock price. WBA stock has lost 85% of its value in the last 10 years. In fact, its stock price was in the $60s when it joined the Dow in 2018, compared to the $20s when it was ousted from the index earlier this year. Walgreens Boots Alliance stock has only been getting cheaper, and has lost over half of its market cap since leaving Dow.

Stock prices are often a reflection of earnings (or rather earnings growth), and the multiples investors are willing to pay for those earnings - usually measured by the price-to-earnings multiple.

WBA’s Earnings Have Fallen

In its fiscal year 2018, Walgreens Boots Alliance reported revenues of $131.5 billion, which were 11.5% higher YoY, while its adjusted earnings per share (EPS) came in at $6.02, which was 18% higher than the previous fiscal year. Those looked like a pretty good set of numbers, and the stock traded at double-digit price-to-earnings (PE) multiple back then. 

While the company's revenues in the fiscal year 2023 were slightly higher than in the fiscal year 2018, its profits have nosedived.

In June, Walgreens Boots Alliance cut its fiscal 2024 adjusted EPS guidance to $2.80-$2.95, which is less than half of what it generated in the fiscal year 2018. Even at the low end of its guidance, the stock trades at just 3.12x the expected adjusted earnings for the current fiscal year. 

While those multiples – when looked at in conjunction with the 11% dividend yield – might make WBA look like a stock worth pouncing on, they don’t tell the complete story. In mid-2015, its next 12-month PE multiple peaked at above 23x, but WBA’s valuation multiples have gradually derated over the years. 

To sum it up, the fall in WBA’s earnings over the years, coupled with the resultant compression in its valuation multiples, has driven its stock to multi-year lows.

What’s the Forecast for Walgreens Stock?

The forecast for Walgreens doesn't look too rosy amid the intensifying competition from online pharmacies. In the prescription business, pharmacy benefits managers (PBMs) have eaten into its margins.

In fact, during the fiscal Q3 earnings call, Walgreens spoke about its relationship with PBMs several times, while stressing that it is in “active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”

Incidentally, during the earnings call, CEO Tim Wentworth was quite upfront about the issues plaguing the industry and said, “We are at a point where the current pharmacy model is not sustainable, and the challenges in our operating environment require we approach the market differently.”

Wall Street analysts are quite bearish on WBA stock, and understandably so. Of the 15 analysts covering Walgreens, only 2 rate it as a “Strong Buy,” while 10 recommend a “Hold.” The remaining 3 analysts rate the stock as a “Sell” or lower.

Is Walgreens Stock a Buy for Its Dividend Yield?

Walgreens cut its dividend by almost half earlier this year, but its yield is still over 11%. This is the perfect example of how a crash in stock price can bump up the dividend yield to ridiculous levels.

The company’s dividend still looks to be at risk, as Walgreens hasn’t been generating enough cash flows to cover its dividends. As Walgreens continues to cut costs and restructure its business, I believe it is a matter of time before it cuts or even suspends its dividend altogether.

Incidentally, Intel (INTC) – which has been jostling with Walgreens for a place at the bottom of the S&P 500 Index this year – also recently suspended its dividend, as the once-iconic chipmaker tries to transform its business. WBA’s woes are no different from Intel's, and the company might likewise need to reconsider its dividends as it works towards a more sustainable business model.