Title: Can WBA Stock Continue to Skyrocket?
Walgreens Boots Alliance (WBA) witnessed a remarkable 27.5% surge in its share price on January 10, 2024, though it's still a long way from recovering from its 64% tumble the previous year. This surge has caught the attention of investors, especially those seeking high dividend yields, as WBA offers an enticing 8.5% yield at present.
Many investors are left pondering whether this recovery will continue or if it's time to exit the beaten-down retail pharmacy chain operator. By analyzing its latest financial report, we can discern if it's wise to buy, sell, or hold on to this high-yield dividend stock.
The Factors Behind the Stock's Surge
Walgreens reported its fiscal first quarter earnings demonstrating an unexpected improvement, with adjusted earnings of $0.51 per share compared to the analysts' average estimate of $0.40 per share. This positive outcome was followed by a more optimistic than anticipated forward-looking guidance.
Furthermore, Evercore analyst Elizabeth Anderson elevated her bank's price target for WBA from $9 to $12 per share, a move that's on the right track but still not far from the stock's closing price of $11.75 on January 10.
Reasons for Caution
Despite the encouraging report, Walgreens hasn't made significant progress in addressing the pressing challenges impacting the overall retail pharmacy industry. According to a Federal Trade Commission report, pharmacy benefits management (PBM) operations under the control of three large companies - CVS Health, UnitedHealth Group, and Cigna - manage approximately 79% of prescription drug claims for 270 million Americans.
These vertically integrated businesses collect insurance premiums, provide medical care, and run mail-order pharmacies, placing Walgreens - without its own integrated PBM - at a disadvantage in the U.S. market. The rise of low-cost providers, such as Cost Plus Drugs and Amazon Pharmacy, offers stiff competition. In response, CVS Health recently launched a similar low-cost model, CostVantage, to compete in the market.
Buying, Selling, or Hanging On?
Despite facing challenges in the U.S. pharmacy market, Walgreens managed to record a 6.6% year-over-year increase in U.S. retail pharmacy sales during its fiscal first quarter. Although this segment's sales are growing, its margins continue to decline. Adjusted operating income from U.S. retail operations was only 1.3% of sales, a sharp decline from the 4% margin reported two years earlier.
With growing U.S. healthcare sales being the only bright spot, Walgreens still incurs substantial losses in this segment. The company reported a $325 million operating loss for its U.S. healthcare segment in the fiscal first quarter of 2025, leading to an overall obligation of $245 million for the period.
At the moment, the high dividend yield of above 8% is tempting, but without substantial profits to dish out, future dividend cuts could be on the horizon for this drugstore giant. It's generally wise to stay on the sidelines until its bottom line recovers robustly.
Given the recent surge in Walgreens' share price, some investors might be considering increasing their investments in this high-dividend stock. However, it's crucial to remember that while the current yield is enticing, the company's financial report suggests potential challenges in its U.S. market, such as declining margins and substantial losses in its healthcare segment. To make an informed decision, investors should closely monitor the company's efforts to address these issues and improve its bottom line.
In light of the industry-wide challenges and Walgreens' own financial struggles, it might be prudent for some investors to hold off on investing more money in this pharmacy chain operator. Instead, they could consider monitoring the situation and potentially investing once the company shows clear signs of improving its financial performance and dividend sustainability.
