Can the Worst-Performing Stock on the Dow Turn Things Around in 2024?

The pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA) is going to end the year as the worst performer among the 30 blue-chip stocks on the Dow Jones Industrial Average. As of Dec. 28, it was down about 29% year to date, and the next closest is Chevron (NYSE:CVX), which is off 15% in 2023.

Because Walgreens reports earnings a month earlier than most stocks, it will post its fiscal first-quarter results on Jan. 4. This will be the first report under new CEO Tim Wentworth, so investors will be watching that closely for insight into what to expect for Walgreens next year. Before then, it might be a good time to review where Walgreens stands heading into the new year and examine its prospects for 2024.

At least $1 billion in cost cuts

This year’s results have not been pretty for Walgreens, but there were some positive signs. Sales were up nearly 5% year over year to $139 billion with revenue gains in all three segments — U.S. retail pharmacy, international and U.S. healthcare. The problem has been high costs, which have eaten into profits and caused the company to suffer a $3.1 billion net loss, or $3.57 per share, in fiscal 2023.

Management knows it has to get costs under control, which is why it announced an aggressive cost-reduction plan earlier this year. The company intends to reduce costs by at least $1 billion and lower capital spending by approximately $600 million. It will do this in numerous ways: by reducing headquarters-related costs, non-essential expenses, and contracted or project work. Walgreens also plans to close unprofitable stores and reduce store hours based on the local market trends.

Interim CEO Ginger Graham said the company will also use artificial intelligence to more accurately forecast demand to optimize its transportation network and drive supply chain efficiencies. In addition, the company is implementing a centralized inventory system in an effort to improve customer service, simplify workflows, and reduce excess inventory, and it is opening regional micro-fulfillment centers to improve product availability and reduce total inventory levels.

These initiatives are designed to reduce costs, but they are also necessary to redirect the focus to investments that improve efficiency and accelerate growth, particularly in its U.S. healthcare business, where it is “intently focused on accelerating our profitability,” said Graham. This is where the new CEO, Tim Wentworth comes in.

Wentworth joined Walgreens on Oct. 23 from Cigna, where he was the founding CEO of Evernorth, Cigna’s health services organization. Before that he was CEO of Express Scripts, the largest pharmacy benefit manager in the country.

“WBA has a differentiated model with the power to build on the company’s pharmacy strength and trusted brand to evolve healthcare delivery,” Wentworth said upon being hired. “I believe in WBA’s vision to be the leading partner in reimagining local healthcare and well-being for all.” 

Turnaround could take time

In the fiscal fourth-quarter earnings report, Graham said that the impact of the expense reduction plan on profitability won’t start to show until the second quarter of FY 2024. Overall, the company anticipates 1% to 4% sales growth next year and adjusted operating income of $3.4 billion to $3.7 billion, which would be about flat compared to fiscal 2023.

One of the best things about Walgreens over the years has been its dividend, which it has increased annually for 47 straight years. It currently pays out a huge 7.1% yield with a 48% payout ratio. The financial struggles Walgreens has experienced over the past year or so have resulted in lower income and cash flows, but the company said it remains committed to maintaining its dividend.

The last thing about Walgreens that I’ll mention is its valuation. With a forward price-to-earnings ratio that is just under eight, it is dirt cheap, but for good reason, as there has not been much earnings growth.

While it looks like Walgreens is on the right path with the moves it is making, turnarounds take time and require execution. It is not a stock I’d buy at this point, but I don’t think its price is going to move up much at all. Thus, you may want to monitor its progress over the next few quarters to see if and when things start to turn.