We recently compiled a list of the 10 Biggest Dividend Cuts and Suspensions of 2024. In this article, we are going to take a look at where Walgreens Boots Alliance, Inc. (NASDAQ:WBA) stands against the other stocks.
Dividends hold great appeal for investors—they appreciate receiving them and strongly dislike reductions. Despite this, numerous major companies have reduced their dividend payments over time for various reasons. This trend, which gained momentum in 2020, persists as many companies continue to recover from the financial impact of the pandemic, leading to further dividend cuts.
According to research by McKinsey, outside of financial crises, only 1% to 2% of dividend-paying companies reduce their payouts annually, typically involving seven or eight major firms. The key for investors is to identify such companies in advance and avoid them until after the dividend has been reduced, which can present new opportunities. However, predicting which companies might cut dividends can be challenging. Wolfe Research strategist Chris Senyek highlighted three warning signs: excessively high yields, which may indicate underlying problems; high debt levels, which divert cash flow to interest payments rather than shareholders; and a high payout of free cash flow, leaving little cushion for the company in times of economic downturns or recessions.
Also read: 10 Dividend Stocks For Steady Income
While dividend cuts are generally disappointing for investors, Morgan Stanley offers an interesting perspective on them. Although dividend stocks typically suffer when payouts are reduced, some of these stocks might still present opportunities, according to the firm. Companies often cut dividends due to financial difficulties or economic challenges. Research from Morgan Stanley shows that investors usually sell off these stocks in the six months after the cuts are announced. However, once the initial negative reaction is factored in, there may be attractive buying opportunities in certain cases, as noted by strategist Todd Castagno. Here are some comments from the analyst:
“In the 6-months following a change in regular quarterly dividend policy, we found companies that announced a dividend cut of more than -25% underperformed the market by -1,200 bps, on average, while smaller dividend reductions outperformed by +480 bps, on average.”
According to Castagno, one year after announcing a dividend reduction, companies that cut their payouts by 30% or less outperformed the market by 1,900 basis points, while those with cuts deeper than 30% lagged the market by 1,800 basis points on average. Morgan Stanley analyzed Russell 1000 dividend-paying companies that reduced their dividends between 1962 and 2024. Over the past year, numerous companies have lowered their payouts, and the firm compiled a list of 30 such companies, excluding those in the financial, utilities, and real estate sectors. While many firms implemented significant dividend cuts, several reduced their dividends by 30% or less.
That said, many companies have regained strong footing and recovered quickly after the pandemic, which has led to a decline in the number of dividend cuts over the years. A report by S&P Dow Jones Indices revealed that only 27 companies reduced their dividends in Q3 2024, marking a 56.5% decrease from 62 companies in Q3 2023. The total value of these cuts was $4.6 billion in Q3 2024, down from $9.2 billion in the same quarter the previous year. Over the 12 months ending in September 2024, 140 companies reduced their dividend payments, a significant 70.8% drop from 479 cuts in the prior 12-month period. The overall value of dividend decreases for the current period was $19.5 billion, a 26.4% reduction compared to $26.4 billion during the previous 12 months.
Despite these encouraging numbers, many major companies have disappointed investors by reducing their dividend payouts in 2024.
Our Methodology:
For this list, we checked companies that have announced dividend reductions in 2024 due to the current market conditions and other factors and picked 10 prominent names from that list. Next, we ranked these stocks according to the number of hedge fund investors having stakes in them at the end of Q3 2024, according to Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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Walgreens Boots Alliance, Inc. (NASDAQ:WBA)
Number of Hedge Fund Holders: 33
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) ranks fifth on our list of companies with recent dividend cuts. The Illinois-based multinational holding company owns retail pharmacy chains and various pharmaceutical manufacturing and distribution companies. It has faced challenges since the start of the year. The company took a major hit when it cut its dividend by 50%, ending nearly 50 years of consistent increases. It has also struggled with competition from online retailers and pressure from pharmacy benefit managers (PBMs). According to the company, the dividend reduction will help generate capital to invest in the growth of its pharmacy and healthcare businesses. Since the start of 2024, the stock has declined by over 64%.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA), similar to other drugstores, has faced challenges due to a decline in COVID-19 vaccines and testing, reduced reimbursement for prescriptions, and pharmacy staffing shortages. However, the recent quarterly earnings are somehow encouraging. The company reported revenue of $37.55 billion in fiscal Q4 2024, which showed a 6% growth from the same period last year. The revenue also surpassed analysts’ estimates by $2 billion. The company expects its adjusted EPS for fiscal 2025 to range from $1.40 to $1.80, with growth in US Healthcare and International operations expected to more than offset a decline in US Retail Pharmacy. This projection also factors in a higher adjusted effective tax rate and lower contributions from sale-leaseback transactions and earnings from Cencora.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) also reported a strong cash position in Q4. The company generated $1.3 billion in operating cash flow and its free cash flow for the quarter came in at $1.1 billion. The free cash flow grew by $537 million from a year ago period. It currently pays a quarterly dividend of $0.25 per share with a solid dividend yield of 10.47%, as of December 22.
Of the 900 hedge funds tracked by Insider Monkey at the end of Q3 2024, 33 funds owned stakes in Walgreens Boots Alliance, Inc. (NASDAQ:WBA), compared with 35 in the previous quarter. These stakes are worth nearly $282 million in total.
Overall WBA ranks 5th on our list of the stocks with the biggest dividend cuts in 2024. While we acknowledge the potential of WBA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WBA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
