Walgreens’ Key Risks
Change is often the biggest risk that companies face, and the U.S. healthcare sector is undergoing a major evolution as a result of the Affordable Care Act and a need to reduce costs.
In the U.S., 96.8% of Walgreens’ prescription sales last fiscal year were third party sales, where reimbursement is primarily received from managed care organizations. The government is doing all it can to reduce prescription drug costs and pharmacy reimbursement rates. The way drugs are priced is also rapidly changing.
Changes in Medicare and Medicaid funding and continued consolidation throughout the entire healthcare chain could pose unexpected challenges to Walgreens’ pharmacy operations. Margins could be compressed, or competition from low-cost retailers such as Walmart could increase and take away some store traffic.
The market’s growth can also be impacted by changes in the number and price of generic drugs. The generic drug wave has largely played out, and future trends are uncertain. Walgreens does best when new generics hit the market.
Walgreens Boots Alliance also faces risk from its acquisition binge. Big acquisitions often fail to create shareholder value, and Walgreens has made its biggest bets ever in recent years. If management fails to generate expected synergies or encounters unexpected integration challenges, the company will be challenged.
Dividend Analysis: Walgreens Boots Alliance
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Walgreens’ long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Walgreens Boots Alliance Inc (NASDAQ:WBA) has one of the safest dividend payments in the market with a Dividend Safety Score of 97. The company’s strong safety rating starts with its payout ratio, which sits near 30% today. While Walgreens’ earnings payout ratio has nearly doubled over the last decade, it remains at a very healthy level.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
The drugstore industry is also resistant to recessions. Consumers still need their prescriptions regardless of how the economy is doing, which helped Walgreens grow its sales during the recession. This is one reason why we consider healthcare to be one of the best stock sectors for dividend income.
Source: Simply Safe Dividends
Walgreens’ business model also generates plenty of stable and growing free cash flow, which is needed to fund the dividend. The company’s mature store base and economies of scale throw off a lot of cash.
Source: Simply Safe Dividends
While Walgreens’ operations have a low operating margin near 5%, the company turns over its inventory rapidly to earn a strong return on invested capital. As seen below, Walgreens has created economic value by generating a double-digit return for most of the last decade, which is often the sign of a moat.
Source: Simply Safe Dividends
