Walgreens Boots Alliance gains after major business change

Walgreens Boots Alliance (NASDAQ:WBA) today announced a series of strategic moves aimed at improving stock performance.

The operator of a major retail pharmacy chain announced it was reducing its quarterly dividend by 48% to 25 cents per share, a decision aimed at strengthening cash flow and supporting investments in sustainable growth initiatives within its pharmacy and healthcare businesses. This marks the first time the company has cut its dividend in nearly 50 years.

Moreover, the company’s management said it is evaluating all strategic options to create sustainable long-term shareholder value, a move that would offset any weakness resulting from the dividend cut.

WBA is one of the largest companies in retail pharmacy with approximately 12,500 locations throughout the United States, Europe and Latin America.

Shares were up 3% in Thursday morning trading.

How was WBA’s performance in F1Q24?

WBA announced major strategic changes with the release of its first fiscal quarter results. Overall, the company reported better-than-expected results with first-quarter adjusted earnings per share of 66 cents, which beat the average analyst estimate of 62 cents. The company’s total revenue for the quarter was $36.71 billion, surpassing the Street consensus of $35.04 billion.

Walgreens’ U.S. sales reached $28.94 billion, exceeding estimates of $27.56 billion. Internationally, Walgreens Boots also posted solid sales of $5.83 billion, beating estimates of $5.53 billion.

“WBA delivered fiscal first quarter results in line with overall expectations, reflecting disciplined execution in a challenging consumer environment,” said CEO Tim Wentworth.

“We are proud to be a trusted, independent partner providing health care to millions of people. And we will leverage our regional and convenient presence to connect with patients and also help payers, providers and pharmaceutical companies achieve better health outcomes at lower costs.”

The CEO also highlighted a $278 million after-tax charge for fair value adjustments to variable prepaid forward derivatives related to the monetization of Cencora stock. Adjusted operating income for the quarter was $687 million.

Net cash utilized in operating activities amounted to $281 million, with operating cash flow negatively impacted by expected inventory build-up during the U.S. and U.K. holiday season and the timing of payer repayments.

Free cash flow was negative $788 million, a decrease of $671 million compared to the same quarter last year, primarily due to a reduction in working capital and lower revenues. Capital expenditures also decreased by $104 million compared to the same period last year.

Despite the weak FQ1, Walgreens Boots maintained its adjusted EPS guidance for the year in the range of $3.20 to $3.50, despite anticipating challenges such as lower sales and rental contributions, higher tax rates and lower COVID-19 contributions impacting underlying revenue growth. .

The consensus for FY EPS is $3.33. Moreover, the company aims to break even on adjusted EBITDA in its U.S. healthcare segment this year.

New CEO urges evaluation of strategic options

WBA also published an assessment of all strategic options focused on quickly adjusting costs and increasing cash flow. The dividend action is consistent with our goal of strengthening cash flow and redirecting capital to strategic initiatives.

“We will take a balanced approach to capital allocation priorities, evaluating all strategic options to create sustainable long-term shareholder value, with a focus on right-sizing expenses and rapid action to increase cash flow,” the CEO said. “There is,” he added.

The dividend cut has significantly lowered WBA’s dividend yield, which currently stands at 3.9% as of Wednesday’s close. The company previously yielded more than 7%, making it the highest dividend-paying stock in the Dow Jones Industrial Average, according to CNBC.

The decision to reduce the dividend and carry out a strategic review is in line with Wentworth, who was appointed CEO in October last year, as he works to steer the company through difficult times.

“(Wentworth’s) strong track record in health care should provide a solid foundation for understanding the many nuances that (Walgreens) is currently navigating,” JP Morgan analyst Lisa Gill wrote in a client note.

WBA recently appointed Wentworth as CEO in a strategic move to reverse declining profits. Wentworth, who has nearly 30 years of healthcare leadership experience, joins the company at a challenging time. Today’s actions are likely the beginning of bold steps aimed at improving long-term shareholder value.

Walgreens saw its stock price decline 30% last year due to factors such as weak demand for COVID-related products, declining pharmacy reimbursement rates, increased competition from online retailers, labor unrest among pharmacy employees in the fall and a difficult macroeconomic environment.

The company attributed the decline in demand for medicines and vaccines to a easing respiratory virus season this fall. The company also emphasized Medicaid redetermination, a periodic assessment conducted by each state’s Medicaid agency to assess a beneficiary’s continued eligibility for coverage.

summary

Walgreens’ stock rose in early trading Thursday after the company reported first-quarter earnings, which topped average analyst estimates. At the same time, the drugstore chain significantly reduced its quarterly dividend, nearly halving it to 25 cents per share.

However, this was offset by the announcement of a strategic review process, which is generally positive for the stock as it could involve an outright sale of the business.