1 Reason to Buy Walgreens, 1 Reason to Sell, Better High Yield Stocks to Buy Either Way

Walgreens Boots Alliance (W.B.A. 3.19%) I’ve been investing brutally over the last 9 years. The stock is down more than 75% from the all-time high it reached in early 2015. The only saving grace for investors during this period has been the company’s dividend, which the board of directors has steadily increased each year. From 2014 to the end of 2023, payments increased by 40%.

Well, even that is gone, and with the dividend nearly halved at the end of last year, the payout is now 26% lower than it was in 2015.

The good news is that the new CEO is taking steps to cut costs and promote profitable growth. Is Walgreens stock a buy now? Keep reading for one reason it might be attractive, key yellow flags that suggest it probably isn’t, and stocks you might consider instead.

Reason to buy: CEO accelerating turnaround

Tim Wentworth was appointed CEO on October 11 and wasted no time implementing cost-cutting efforts at the company. Twelve weeks later, when it reported its first quarter results, one of the first lines of the press release announced a 48% dividend cut.

This movement made a bold statement that there would be no sacred cows in this transition. Before the cut, Walgreens increased its dividend by a surprising amount every year. 47 years old. With the support of a board of directors that has final say on matters such as dividends, Wentworth quickly took steps to clean up Walgreens’ financial organization. He takes the business and returns it to profitable growth.

In addition to cutting the dividend, the company has taken several practical steps to lower its costs and expenses. The company said it would cut spending by $1 billion compared to 2023 through lower capital spending and improved working capital.

Why it’s for sale: The math is still a mess.

Wentworth is acting quickly and with the support of its Board of Directors. His experience in the healthcare industry is a real plus. But the reality is that Walgreens’ quick moves are as much a product of necessity as a desire to improve its business.

Despite top-line improvements that led to an 8% increase in sales in the first half of the fiscal year, non-pharmacy retail sales fell 5.3%. Management said seasonality had some influence, but it also lowered its full-year profit expectations, citing the competitive environment. I think these two things are more related than just seasonality.

At the same time, one of the company’s biggest initiatives, healthcare, has taken a further step back. Walgreens took a $5.8 billion writedown on its investment in VillageMD, reflecting much lower expectations for its overall value over time. As a result, VillageMD sales grew 20% last quarter, but its healthcare business continues to post operating losses.

This adds to Walgreens’ cash flow problems. The company burned through $918 million in operating cash through the first half of the year and spent $858 million on capital expenditures. That’s a lot of money that needs to come off the balance sheet to cover the checks.

Despite promised costs and savings, Walgreens many A thing to do. Working capital remained unchanged for the first six months of the fiscal year, but total assets on the balance sheet stood at about $11 billion.

About half of that is VillageMD’s impairment, but what’s easy to miss is that it realized $1.7 billion in gains from stake sales in 1999. Senkora So far this year, Cencora’s market value has increased enough to offset the impact of these sales on its balance sheet.

And when measured by cash inflows and cash outflows generated from operations, Walgreens long The turnaround is complete. This is especially notable for income investors who may think the “new” dividends are safe. Barring this cash flow reversal, there will certainly be another cut.

Buy better stocks instead

If you are looking for a company with consistent income, high returns, or the potential to lead the market over the long term, real estate income (o 1.10%) It might be a better choice. As a starting point, the dividend is very safe, protected by sales and strong cash flow from tenants who rely on the properties they rent from Realty Income to generate profits.

Realty Income is one of the largest net rental REITs in the world. You own the property and your tenants pay rent, cover property taxes, and pay for improvements and maintenance. Tenants include Walgreens and its competitors. CVS HealthAlong with hundreds of other tenants in retail, restaurants, experiences, other e-commerce and macroeconomically resilient businesses.

As one of the leading capital allocators in real estate, Realty Income’s business is based on creating value for tenants and investors, and growing dividends is a core tenet of its business model. Since the IPO in 1994, the dividend has been increased every year, not just every year. a quarter. This is also a nice bonus for income investors as it is a monthly payer.

Putting all this together, the business will be stronger, the dividend will be more secure, and the dividend will continue to grow. Did I mention that the 5.7% yield at recent prices is better than Walgreens’ 4.6% yield? There’s that too.