Walgreens Boots Alliance announced a 48% cut to its quarterly dividend on Thursday, despite beating Wall Street’s earnings expectations in its fiscal first quarter. The drugstore giant says the move will free up cash to invest in transforming its retail stores and expanding its healthcare services.
Quarterly Results Top Estimates
The company reported adjusted earnings per share of $1.16 on revenue of $36.7 billion for the quarter ended November 30. Analysts had expected EPS of $1.13 on revenue of $36.1 billion.
While sales at Walgreens stores open at least a year fell 1.5% from a year ago, pharmacy sales grew 2.7%, helped by increased Medicare Part D prescriptions. The company also saw growth in its AllianceRx specialty and mail-order pharmacy business.
Key Quarterly Metrics
| Metric | Result | Year-Ago | Estimate |
|---|---|---|---|
| Earnings per share | $1.16 | $1.46 | $1.13 |
| Revenue | $36.7 billion | $33.4 billion | $36.1 billion |
| Sales at stores open ≥1 year | -1.5% | 7.7% | -1.3% |
Dividend Cut to Fund Business Investments
Despite the sales and earnings growth, Walgreens slashed its dividend by nearly 50% to 35 cents. The dividend reduction will save the company about $1 billion per year in cash.
CEO Tim Wentworth said the move “provides additional flexibility to invest in the business and pay down debt while returning cash to shareholders.”
Analysts believe Walgreens will use the savings to invest in upgrading its stores, expanding healthcare services, enhancing its digital capabilities, and paying down debt.
With e-commerce giant Amazon ramping up its move into healthcare, Walgreens and rival CVS face increased pressure to modernize store experiences and emphasize health services to remain competitive.
Mixed Response from Investors
Stock market reactions to the news were mixed on Thursday. Walgreens shares initially rose more than 5% on the earnings beat before turning negative after the dividend reduction was announced. The stock closed down 1.3% at $32.43.
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“The dividend cut is a bit shocking,” said Edward Jones analyst John Boylan. “While it makes sense long-term, some income investors will not like this move.”
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JP Morgan analyst Lisa Gill called the news “an overall positive” that shows Walgreens is “finally making some tough choices” to invest in its future.
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Morgan Stanley analyst Ricky Goldwasser said, “Short term pain for long term gain is the best path forward” for Walgreens.
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RBC Capital Markets analyst Karen Lynch said the dividend cut was “more drastic than we expected,” but it shows management is serious about funding growth initiatives.
Future Strategic Initiatives
On the company’s earnings call, Walgreens executives outlined several areas of strategic investment in the coming quarters:
- Store renovations: Accelerating pace of store modernizations to emphasize health services
- Digital health: Expanding telehealth offerings and digital health partnerships
- Specialty pharmacy: Growing higher-margin specialty pharmacy business
- Primary care: Opening additional primary care clinics co-located in stores
- Cost cuts: Continuing cost reduction program to drive efficiencies
Walgreens says these initiatives, funded in part by the dividend savings, will better position the company for long-term growth. But the transformation efforts will take time to impact the bottom line.
Management issued fiscal 2024 earnings guidance below Wall Street forecasts, projecting modest profit growth this year. With healthcare competitive threats mounting, Walgreens cannot afford to wait to enact its strategic shifts. Thursday’s dividend cut announcement made clear the company’s willingness to take short-term pain to invest in its future.
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