Shares of Walgreens Boots Alliance (NASDAQ: WBA) rocketed 27.5% greater on Friday, Jan. 10, 2024. This is not practically sufficient to get well from a 64% drop the inventory notched final 12 months, but it surely’s an enormous step in the precise route.
Buyers of all stripes are questioning whether or not extra positive factors could possibly be forward for the beaten-down retail pharmacy chain operator. Earnings-seeking traders are significantly as a result of, regardless of the current run-up, shares of Walgreens Boots Alliance have been providing an eye-popping 8.5% dividend yield.
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Can Walgreens Boots Alliance inventory proceed rising, or ought to traders use the inventory’s current acquire as a chance to exit? Let’s take a look at what the pharmacy chain operator stated in its newest report back to see whether or not it is time to purchase, promote, or maintain the ultra-high-yield dividend inventory.
Why Walgreens inventory shot greater
Throughout its fiscal first quarter that ended on Nov. 30, 2024, adjusted earnings got here in at $0.51 per share. That is lower than half the quantity it was incomes a few years earlier however heaps greater than the Wall Avenue consensus estimate of simply $0.40 per share.
Along with a better-than-expected fiscal first quarter, Walgreens issued forward-looking guidance that was a little bit rosier than anticipated. Whereas the typical analyst anticipated the corporate to foretell earnings to succeed in $1.58 per share in fiscal 2025, administration issued a steerage vary of between $1.40 and $1.80 per share.
Citing surprisingly sturdy outcomes from its retail operation, Evercore analyst Elizabeth Anderson raised her financial institution’s price target to $12 from $9 per share. The adjustment is a step in the precise route, however the brand new goal is not removed from the inventory’s closing worth of $11.75 on Jan. 10.
Causes to be cautious
Anderson and her friends had been shocked by Walgreens’ current outcomes, however the firm has carried out little to handle the principle points pressuring the retail pharmacy trade as an entire. In line with a report from the Federal Commerce Fee, pharmacy benefits management (PBM) operations from simply three firms, CVS Well being, UnitedHealth Group, and Cigna, handle 79% of prescription drug claims for 270 million People.
All three of the large PBMs are vertically built-in with managed care suppliers and mail-order pharmacies. After seeing stated suppliers, lots of their members get prescriptions stuffed by mail-order pharmacies run by the identical firm that collects their insurance premiums. Walgreens does not have an built-in PBM, and its U.S. pharmacy operation is struggling consequently.
Low-cost generic medication was once an incredible supply of income for retail pharmacies. Sadly, for Walgreens, the hovering reputation of Mark Cuban’s Price Plus Medicine and its clear enterprise mannequin made dishing out generic medication a low-margin enterprise. To compete with low-cost suppliers, equivalent to Amazon Pharmacy and Price Plus Medicine, CVS Well being not too long ago transformed its business pharmacy contracts to an analogous mannequin it calls CostVantage.
Purchase, promote, or maintain?
Regardless of stress from pharmacies vertically built-in with health insurers, Walgreens reported fiscal first-quarter U.S. retail pharmacy gross sales that rose 6.6% 12 months over 12 months. Whereas gross sales from this necessary section are rising, margins declined once more. Adjusted working earnings from U.S. retail operations got here in at simply 1.3% of gross sales, down sharply from the 4% margin the corporate reported two years earlier.
Declining U.S. pharmacy margins could possibly be an enormous drawback as a result of Walgreens’ nascent U.S. healthcare segment remains to be bleeding cash. The corporate’s U.S. healthcare operation misplaced $325 million within the fiscal first quarter, which led to an total working lack of $245 million for the three-month interval.
An eye fixed-popping dividend yield above 8% in the meanwhile is tempting. With none income to distribute, although, one other deep dividend slash could possibly be on this inventory’s future. It is in all probability greatest to observe from the sidelines till its backside line is firmly in constructive territory once more.
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John Mackey, former CEO of Entire Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Cory Renauer has positions in Amazon and CVS Well being. The Motley Idiot has positions in and recommends Amazon. The Motley Idiot recommends CVS Well being and UnitedHealth Group. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
