Walgreens Boots Alliance Gains After Making Major Business Changes

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

The operator of a major retail pharmacy chain announced a 48% reduction in its quarterly dividend to 25 cents per share, a decision aimed at bolstering cash flow and supporting investments in sustainable growth initiatives within its pharmacy and healthcare businesses. This marks the company’s first dividend cut in nearly five decades.

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

WBA is one of the largest players in retail pharmacy with approximately 12,500 locations across the US, Europe and Latin America.

Shares gained 3% in early Thursday trade.

How WBA Performed in F1Q24?

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

Walgreens Boots’ sales in the United States reached $28.94 billion, surpassing the estimated figure of $27.56 billion. Internationally, Walgreens Boots also demonstrated solid sales, reporting $5.83 billion, also outperforming the estimated $5.53 billion.

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

“We are proud to be a trusted and independent partner of choice, delivering healthcare to millions of people. And, we will leverage our local, convenient presence to engage with patients and help payors, providers, and pharma companies also achieve better health outcomes at an affordable cost.”

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

Net cash utilized for operating activities amounted to $281 million, with operating cash flow facing negative effects due to an expected inventory build for the US and UK holiday season, as well as the timing of payor reimbursement.

Free cash flow reflected a negative value of $788 million, marking a $671 million decline compared to the same quarter last year, primarily attributed to the phasing of working capital and reduced earnings. Capital expenditures also decreased by $104 million compared to the corresponding period in the previous year.

Despite the FQ1 beat, 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 sale and leaseback contributions, a higher tax rate, and decreased COVID-19 contribution impacting underlying earnings growth.

The consensus for FY EPS stands at $3.33. Moreover, the company aims to breakeven on adjusted EBITDA for its U.S. Healthcare segment in the current year.

New CEO Pushes for Evaluation of Strategic Options

WBA also announced the evaluation of all strategic options with a focus on swift cost adjustments and increased cash flow. The dividend action is aligned with the goal of enhancing cash flow and redirecting capital towards strategic initiatives.

“We are evaluating all strategic options to drive sustainable long-term shareholder value, focusing on swift actions to right-size costs and increase cash flow, with a balanced approach to capital allocation priorities,” CEO added.

The dividend cut significantly lowered WBA’s dividend yield, which now stands at 3.9% based on Wednesday’s closing price. The company was previously yielding over 7%, which made it the highest-paying dividend stock in the Dow Jones Industrial Average, according to CNBC.

The decision to reduce dividends and undertake a strategic review coincides with Wentworth, who was appointed as CEO in October last year, working to navigate the company through challenging circumstances.

“(Wentworth’s) strong track record in healthcare services should provide a solid base for understanding much of the nuance that (Walgreens) is currently navigating,” J.P. Morgan analyst Lisa Gill wrote in a client note.

WBA appointed Wentworth as its CEO in a strategic move aimed at reversing recent profit declines. Wentworth, who has nearly three decades of healthcare leadership experience, joins the company at a challenging time. Today’s actions are likely just the beginning of bold moves aimed at improving long-term shareholder value.

Walgreens witnessed a 30% decline in its shares last year, due to factors like weakening demand for Covid-related products, reduced pharmacy reimbursement rates, heightened competition from online retailers, labor unrest among pharmacy staff in the fall, and a challenging macroeconomic environment.

The company attributed a decline in demand for medications and vaccines to a milder respiratory virus season this fall. Furthermore, the company highlighted Medicaid redeterminations, regular assessments undertaken by each state’s Medicaid agency to evaluate the ongoing eligibility of beneficiaries for coverage.

Summary

Walgreens shares gained in early Thusrday trade following the release of its first-quarter results, which topped the average analyst estimate. Concurrently, the pharmacy chain implemented a significant reduction in 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 usually positive for stock as it may include an outright sale of the business.