Is Another Big Dividend Cut Coming for Walgreens in January?

Pharmacy retailer Walgreens Boots Alliance (NASDAQ: WBA) was once seen as a safe dividend stock. Those days are long gone.

In just the past three years, the stock has lost more than 80% of its value. And it not only stopped a decades-long streak of increasing its payouts but also slashed its dividend along the way. The company is in the midst of a turnaround and is considering asset sales and aggressive cost-cutting to try to shore up its business.

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Things have gone from bad to worse for the healthcare stock as it struggles to find a way out of its current tailspin. The question many investors who are still hanging on may be asking is that with its yield at more than 10%, could another dividend cut be coming?

Walgreens last cut its dividend in January

On Jan. 4, 2024, Walgreens reported its first-quarter results for the new fiscal year and announced a steep dividend cut. The 48% reduction to the payout may have come as a shock to investors who were relying on that recurring income.

The reality, however, was that the dividend was unsustainable, and it was really only a matter of time before the company was going to need to do something. It said it was looking to improve its cash flow and that it was going to take on a "balanced approach to capital allocation priorities," which included plans to grow its healthcare business.

The company is set to announce its next quarterly results on Jan. 9, which is when there might also be news about any change to its dividend.

Is another dividend cut likely for Walgreens?

Walgreens has been working on cutting costs, and its free cash flow has improved; in two of the past four quarters, the company has generated positive free cash flow. And for two straight quarters, its free cash has been higher than what it has been paying in dividends.

But overall profitability remains a big concern. Walgreens has incurred an operating loss in three of the past four quarters, and with big question marks surrounding its healthcare strategy, it could take a while before the company is able to get back into the black. Reducing its store count and being leaner will certainly help, but those moves will also take time.

What stood out to me in the press release announcing the 48% dividend cut was that management still wanted to maintain what it considered to be a "competitive yield." Today, the yield is over 10%, and it could easily be cut in half again and still be considered competitive.

I think the best move for Walgreens would be simply to suspend the payout at this point and to fix its operations before worrying about making regular dividend payments again. But another dividend cut does look like it could be a possibility, as the company's financials still aren't all that strong.

Walgreens is still too risky for most investors

A company like Walgreens that is in the midst of a turnaround is going to be an incredibly risky investment. And unless you're a contrarian investor who is comfortable with the potential to incur significant losses, you'll likely be better off seeking out safer dividend stocks with more modest yields than Walgreens.

The stock does look cheap, trading at just six times next year's estimated profits (according to analyst expectations), but it looks more like a value trap at this point than a bargain buy. Its discounted valuation may look tempting, but it comes with significant risks that investors should be careful not to overlook.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.