WBA’s Dividend Aristocrat status is no longer a viable investment thesis
We’ve previously covered Walgreens Boots (NASDAQ:NASDAQ: WBA) in July 2023, discussed a mixed outlook due to deteriorating equity performance and improving balance sheet.Its prospects are also mixed because Downgraded fiscal 2023 guidance and lackluster fiscal 2024 commentary.
WBA 25-year stock price
WBA’s decline is currently painful, especially since WBA was first reported in February 2023, when it has fallen significantly -36.78%/-$13.17, and since July 2023, it has fallen significantly -20.25%/-$5.75.
Based on year-to-date payouts of $1.44 per share, even its Dividend Aristocrat status isn’t enough to make up for the share price decline so far.
Perhaps the pessimism in WBA’s stock price is due to its slower transition into the primary care space, which is its direct competitor CVS (CVS)) has been dominant with its comprehensive insurance products.
WBA 3Q23 US Healthcare Results
However, WBA’s transformation appears to be too slow and too small, compounded by the poor performance of the U.S. healthcare sector in 3Q23. Most newer co-located clinics remain unprofitable, further affected by lower respiratory tract events.
Contribution was lower due to the impact of a $44M settlement of Theranos fraud claims, a $323M impairment related to Boots UK pharmacy license intangibles, a $5.4B after-tax charge on opioid-related claims, and COVID-19, but was offset by past several This was partially offset by a $420 million gain on the sale of ABC stock in the first quarter.
WBA and CVS 1-year stock performance
While the opioid headwinds aren’t just affecting WBA, with CVS also set to pay out nearly $5 billion over 10 years, Mr. Market no longer seems convinced of its turnaround story.
Additionally, without a moat, many other players have invaded the drug, healthcare, and beauty retail space, including Target (TGT), Walmart (WMT), Costco (COST), Rite Aid (RAD), and even Amazon (AMZN). Amazon).
These deep-seated pessimism have directly contributed to WBA and CVS’s share price underperformance over the past year compared to the broader market and tech stock rally to date.
WBA’s prospects have also been significantly worsened by the sudden departures of Chief Financial Officer James Kehoe in July 2023 and CEO Rosalind Brewer in September 2023.
Due to the lack of succession planning and the aggressive consolidation we are observing in the industry, it remains to be seen what new ideas the new leadership may bring to the table, which could cause further uncertainty about its future execution.
While we were optimistic about its reversal in our previous WBA article, everything It is not considered for now as the key support level of $22 may be breached in the near term.
Its balance sheet also deteriorated to $970M in cash/short-term investments (-47.3% QoQ/-78.2% YoY) and long-term debt grew to $8.84B (inline QoQ/+13.6%) due to ongoing impairments and acquisitions % from FQ1’23).
As WBA’s growth slows and impacts profitability, it’s no surprise that there are concerns about the safety of its dividend, with TTM receiving an F rating for Dividend Coverage.
Predicting a further retracement to the previous H1’98 support at $18 is not too pessimistic, which would imply another -18% drop from current levels. Only time will tell.
So, is WBA stock a buy?sell, or hold?
WBA 15-year EV/revenue and P/E valuation
Due to these pessimistic developments, it’s no surprise that WBA’s valuation has been depressed to NTM EV/Revenue of 0.45x, NTM EV/EBITDA of 11.32x, and NTM P/E of 6.00x.
This compares to 1-year averages of 0.51x/11.52x/7.75x and 3-year pre-pandemic averages of 0.61x/8.87x/11.86x. The same pessimism is observed when compared to the Diversified Health/Retail industry’s median EV/EBITDA of 12.63x and P/E ratio of 15.61x.
It is for this reason that our long-term price target of $25.50 has the lowest margin of safety based on consensus FY2025 adjusted EPS of $4.25 and its NTM P/E ratio.
Due to potential capital losses, we prefer to take a wait-and-see approach until bullish support materializes. Only then would we re-rate it to Buy, thanks to its continued dividend payments and potentially expanding dividend yield.
Currently, we prefer to cautiously rate WBA stock a Hold (Neutral). Don’t chase dividends.