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While Dividend Seems Safe, Walgreens Faces Big Challenges

By Charley Blaine - The best you can say about Walgreens Boots Alliance (NASDAQ:WBA) now is that the dividend of $1.76 a year is safe.

Everything else is uncertain, especially after Walgreens' earnings on Tuesday, which even CEO Stefano Pissena called "very disappointing" during the company's analyst call. The prospects are ugly enough that the company cut its fiscal 2019 guidance for 7% to 12% earnings growth on a constant currency basis to flat.

The stock fell 13% on Tuesday and fell below $55 on Wednesday for the first time since 2013. It is the worst-performing stock in the Dow Jones Industrial Average this year, down more than 19%, and off more than 35% from its 52-week high reached last fall.

After the call, a number of analysts cut price targets on the stock into the low $60s. Technical indicators on rate the stock a strong sell.

Sales are getting pressured just about everywhere, but the biggest issue is the U.S. pharmacy business. Insurance companies and government agencies are driving down reimbursement levels. So, while Walgreens is filling more prescriptions (and will be as the population ages), its profit from each sale is shrinking.

Business in the front of its pharmacies is getting hurt, too, in part because old reliables aren't so reliable. This year's flu season wasn't nearly as bad as 2018, cutting into sales of cough, flu and cold medicine. Plus, tobacco sales are lower, in part because Walgreens is getting out of the business.

Its Boots business, which operates pharmacies across of much of Europe, is showing poor results, at least in dollars, as the dollar rises and the pound and euro slip. Plus, European economies aren't doing all that well.

Competitors are doing wild and crazy things. CVS Health (NYSE:CVS) went out and bought health insurance company Aetna (NYSE:AET) for $68 billion.

The analyst call was more notable for what wasn't really addressed.

First, no analyst raised the issue of whether Medicare-for-all might actually happen. CFO James Kehoe noted that the company is implementing $1.5 billion in annual cost cuts and a massive move into digitizing everything. Then, he said, "Over the long term, we are comfortable that our growth model can deliver mid- to high-single digit adjusted EPS growth in constant currencies."

So, for Walgreens the issue is dealing with what appear to be incremental issues posed by any changes to healthcare laws.

This second issue is larger.

Walgreens Boots Alliance (formed in 2014 when Walgreens bought the 45% of Alliance Boots it didn't own) is now a sprawling operation. It has a presence in more than 25 countries, either wholly or through investments or franchises, and counts more than 415,000 employees. While the U.S. is the largest piece portion of that business, it's still hard to juggle when things don't match up country to country.

At least the dividend is not really pressuring operations. It represents about 28% of cash flow. And there's enough cash flowing through the business that the company expects to buy back $1.7 billion in shares each year over the next three, which helps boost reported earnings per share.

Its consistency suggests that the company has the financial strength to fix the business, at least for now.

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