Walgreens Boots Alliance beat Wall Street’s earnings expectations in its fiscal first quarter, but shares saw a rollercoaster day of trading after the company announced it would cut its dividend nearly in half to free up cash for business investments. The drugstore giant also said it is exploring strategic options as part of a broader business review under new CEO Rosalind Brewer.
Earnings Top Estimates While Sales Meet Views
Walgreens on Thursday reported adjusted earnings per share of $0.66 in its fiscal first quarter ended Nov. 30, down from $1.22 a year earlier but above analysts’ expectations for $0.02 per share, according to Refinitiv.
Revenue grew 1.8% operationally to $36.7 billion, which matched Wall Street’s forecasts. Higher prescription volume in the United States helped lift the top line along with retail sales growth compared to a year ago when results were still significantly impacted by the COVID-19 pandemic.
“I’m pleased that our teams executed well to deliver financial outperformance in the first quarter, led by strong sales and operating income growth in our U.S. retail pharmacy business,” Brewer said in the earnings release.
Dividend Slashed 46% to Fund Growth Initiatives
The company lowered its quarterly dividend by 46% to $0.25 per share from $0.46.75 per share starting with its next payout in June. The move will save Walgreens an estimated $700 million in cash annually to help fund investments in store remodels and its healthcare businesses.
“Maintaining an appropriate level of dividend, in line with the cash we expect to generate, will enable accelerated investments in key areas like pharmacy services, digital and healthcare strategy to drive growth,” Brewer said.
Walgreens, which has paid and raised its dividend annually for the past 47 years, said it “remains an important component of its capital allocation strategy.”
Prior to Thursday’s cut, Walgreen’s stock offered an attractive 5% dividend yield to shareholders. The new dividend rate implies a roughly 2.7% forward yield based on Wednesday’s closing price.
Still, investors cheered the earnings beat and decision to plow savings from the dividend cut back into the business. Walgreens stock climbed more than 5% on Thursday after opening lower on the payout reduction.
Strategic Review Could Lead to Asset Sales or Breakup
Along with its results, Walgreens said it has launched a review of strategic options available to create shareholder value. The evaluation will explore alternatives for the company’s Boots UK pharmacy chain, including a potential full or partial sale.
“The board believes now is the right time to evaluate a broad range of value-creating options while continuing to execute the company’s key strategic priorities,” Executive Vice Chairman and CEO Stefano Pessina said.
Walgreens acquired a controlling 55% stake in Boots in 2014 and purchased the remaining 45% two years ago to take full ownership of the British pharmacy retailer.
While no definitive decisions have been made, analysts say Walgreens will likely look to sell all or parts of Boots. Some observers have also questioned whether Walgreens could eventually split into separate retail pharmacy and pharmaceutical wholesale companies.
JPMorgan analyst Lisa Gill said Walgreen’s strategic update “reads to us like the company is now more open to all options.”
“While today’s update now confirms the potential for a sale of Boots, we continue to believe the options extend far beyond Boots,” Gill wrote in a research note.
What’s Next for Walgreens
The quarterly results gave new CEO Brewer her first chance to address investors since taking over as the company’s leader back in March.
“My priority is to ensure Walgreens Boots Alliance is well positioned for sustainable long-term growth,” Brewer said on the company’s earnings call.
The former Starbucks COO said she sees opportunities to enhance Walgreens’ retail offerings, expand partnerships with health care providers and better leverage the company’s pharmacy expertise. Brewer said decisions on the future structure of Walgreens’ businesses will center around what “will best position the company for growth.”
CFRA Research analyst Arun Sundaram sees “encouraging signs of progress” under Brewer. Along with the dividend cut freeing up capital for reinvestment, Sundaram predicts Walgreens will continue working to lower its cost base and divest non-core assets over the coming year.
Still, the next few quarters “could continue to be bumpy amid a challenging macro backdrop,” Sundaram cautioned in his report on earnings.
For the 2023 fiscal year ending next August, Walgreens said Thursday it expects low single-digit growth in adjusted earnings per share. The company also forecast roughly flat sales growth for the year in constant currency.
Walgreens plans to provide another business update when it reports second quarter results in March. That will likely give investors more clarity on the potential outcomes of its strategic review.
Quarterly Results
| Metric | Reported | Year-Ago | Analyst Views |
|---|---|---|---|
| Earnings Per Share (Adjusted) | $0.66 | $1.22 | $0.02 Estimate |
| Revenue | $36.7B | $36.0B | $36.7B Estimate |
| Retail Pharmacy USA Sales | $29.2B | $27.7B | |
| Retail Pharmacy International Sales | $3.0B | $2.5B | |
| Pharmaceutical Wholesale Sales | $7.0B | $6.9B |
Overall, the latest earnings report showed mixed results for Walgreens along with several major strategic decisions that aim to boost long-term investments and reshape the business. While cutting shareholder payouts is never easy, the dividend reduction and business review have put the iconic pharmacy chain on a path toward what may be the most transformational chapter in its 113-year history.
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