Walgreens Boots Alliance, the nation’s largest drugstore chain, stunned investors on Thursday by slashing its quarterly dividend by 48% as part of a strategic shift to free up cash to invest in transforming the company’s retail offerings.
Dividend Cut Sharply Lower Than Expected
The company will now pay a quarterly dividend of $0.25 per share, down from $0.48 previously. This is a much steeper reduction than the modest trim that analysts had expected.
The drastic dividend cut will save Walgreens approximately $1 billion per year that it aims to redirect into rejuvenating its retail stores through e-commerce investments and comprehensive healthcare services.
“We are confident this is the right thing to do for our customers, patients and investors in the business. This will allow us to invest in core parts of our business like pharmacy and healthcare,” said new Walgreens CEO Rosalind Brewer in a conference call.
Mixed Quarterly Earnings
The announcement came as Walgreens reported mixed results for its fiscal first quarter ended November 30.
| Financial Metric | Result | Analyst Expectation |
|---|---|---|
| Earnings per share (EPS) | $0.99 | $0.92 |
| Revenue | $33.4 billion | $32.89 billion |
While Walgreens topped expectations for both EPS and revenue, gross margin contracted by 1.2% year-over-year. The company cited impacts from a weak cough, cold and flu season as well as higher supply chain costs.
“The first quarter results demonstrate continued momentum in key areas like pharmacy while we navigate near-term impacts,” said CEO Brewer.
Strategic Business Transformation
Brewer took the helm as CEO in March 2022 with the core objective to execute a strategic transformation focused on healthcare and omnichannel retail.
The dividend cut will allow Walgreens to accelerate investments in the following key areas:
Primary care services
Walgreens aims to convert as many as 20% of its over 9,000 U.S. retail stores into dedicated primary care clinics over the next three to five years. The stores will offer preventative healthcare checkups as well as diagnosis and treatment for chronic conditions.
This expansion into medical services reflects growing partnerships with providers like VillageMD, which operates more than 200 full-service doctor’s offices co-located at Walgreens stores currently.
E-commerce and digital experience
With consumers rapidly adopting digital channels for shopping, Walgreens is prioritizing upgrades to its website and mobile app. Enhancements will enable improved prescription management and personalized promotions to drive higher online conversion.
Walgreens is also launching a next-day retail delivery service nationwide in the coming months to better compete with rivals like CVS and Amazon.
Supply chain automation
Behind the scenes, Walgreens aims to utilize automation, artificial intelligence and other technologies to optimize its supply chain. This is expected to yield significant cost savings over time.
Outlook and Impact
The substantial dividend reduction shocked many income investors and dealt a blow to Walgreens’ stock price despite the earnings beat. Shares plunged as much as 10% on Thursday.
However, analysts say the dividend cut, while painful in the near term, will give Walgreens financial flexibility to adapt and strengthen its competitive positioning over the long run.
“We believe this difficult decision […] will allow Walgreens to invest appropriately in the business,” stated Morgan Stanley analyst Ricky Goldwasser.
With pharmacy sales still generating over 70% of Walgreens revenue currently, the company aims for its healthcare services expansion to account for 30% of U.S. sales by 2025. Achieving this alongside omnichannel retail growth would help reignite earnings growth—and ultimately support a healthier dividend payment down the road.
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