Walgreens Boots Alliance (NASDAQ:WBA) has grabbed the attention of investors with its massive dividend yield of over 11%. However, this high yield comes amidst a challenging year where Walgreens stock has declined by nearly 66% year-to-date, making it the worst-performing stock in the S&P 500 Index for 2024. In this article, we’ll dive into Walgreens stock performance and evaluate whether the dividend yield is worth the investment risk.

Walgreens’ Historical Significance and Recent Decline

Walgreens has been a pillar in the U.S. retail pharmacy market since going public in 1927 and listing on the New York Stock Exchange (NYSE) in 1934. The company became Walgreens Boots Alliance in 2014 after acquiring a full stake in Alliance Boots. Despite its longstanding history, Walgreens has faced growing challenges in recent years, including stiff competition from both brick-and-mortar and online pharmacies.

In 2018, Walgreens was added to the prestigious Dow Jones Industrial Average (DJIA), but its tenure was short-lived. By 2024, the company was replaced by Amazon (NASDAQ:AMZN) in the DJIA, largely due to its stock price dropping dramatically.

Why Has Walgreens Stock Dropped So Much?

The sharp decline in Walgreens stock performance isn’t due to stock splits or significant corporate overhauls. Instead, it stems from a prolonged fall in the stock price. Walgreens has lost approximately 85% of its market value over the last 10 years. Back in 2018, the stock traded in the $60 range. Today, it hovers below $10, marking the first time since 1996 that Walgreens stock has traded in single digits.

A major driver of this decline has been weakening earnings. In 2018, Walgreens reported revenues of $131.5 billion with an adjusted earnings per share (EPS) of $6.02. Fast forward to 2023, and while revenues have slightly increased, profits have taken a steep dive. For fiscal 2024, Walgreens has projected adjusted EPS between $2.80 and $2.95, less than half of what it reported five years ago.

The 11% Dividend Yield: An Opportunity or a Risk?

Walgreens’ significant 11% dividend yield is one of the highest among S&P 500 companies, but investors should approach with caution. A high dividend yield is often the result of a plummeting stock price rather than robust financial health. Walgreens is a textbook example of this phenomenon, as its stock price has dropped significantly, inflating the dividend yield percentage.

Earlier in 2024, Walgreens cut its dividend by nearly half. Despite the cut, the yield remains attractive to some income-focused investors. However, the company is struggling to generate sufficient cash flow to maintain these payouts, raising concerns about the sustainability of this dividend moving forward. Walgreens has been implementing cost-cutting initiatives and restructuring efforts, but analysts warn that further dividend cuts—or even suspensions—may be necessary.

Can Walgreens Sustain Its Dividend Payments?

Walgreens’ financial struggles are not unique. Other major companies, like Intel (NASDAQ:INTC), have also faced similar challenges. Intel recently suspended its dividend as part of its efforts to transform its business. Given Walgreens’ continued cash flow challenges and increasing competition from online pharmacies, a similar fate could be in store for WBA.

During Walgreens’ fiscal Q3 earnings call, CEO Tim Wentworth acknowledged the pressures the company faces, particularly from pharmacy benefit managers (PBMs) that are squeezing Walgreens’ margins. The company is currently in discussions with PBM partners to align incentives and improve profitability. However, until these issues are resolved, Walgreens’ financial outlook remains precarious.

Is Walgreens a Buy for Dividend Seekers?

While the 11% dividend yield may look appealing on the surface, investors must be cautious. High dividend yields often signal deeper financial issues, and Walgreens’ shrinking profits and competitive pressures indicate significant risks. For those seeking stable income-generating stocks, Walgreens stock performance may not inspire confidence at this time.

Analysts are also bearish on Walgreens’ prospects. Of the 15 analysts covering the stock, 10 recommend holding the stock, while only two have issued a “Strong Buy” rating. The remaining three advise selling the stock. Walgreens’ future largely hinges on its ability to restructure its business and manage intensifying competitive threats.

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