Many corporations slashed their dividend funds this 12 months, together with high tech firm Intel. Spending massive cash on development led to an inevitable crossroads for the corporate that resulted within the tech big deciding to trim its payouts in order that it will have extra cash out there for development initiatives.
One healthcare firm that might discover itself in an identical place is Walgreens Boots Alliance (WBA 0.89%). Whereas its 5.3% yield seems mighty engaging proper now, is that this a dividend that traders can depend on?
Why there is a danger for Walgreens’ traders
It is tempting to have a look at Walgreens’ inventory and say that with a streak of accelerating its dividend for 47 straight years, the payout needs to be a lock. However a decreased dividend is a chance that traders should not overlook.
That is as a result of Walgreens is searching for methods to speed up its development through the latest launch of its U.S. Healthcare phase. It has opened a whole lot of major care clinics by an funding in VillageMD and plans a whole lot extra over the following few years. It spent $5.2 billion on an preliminary funding in VillageMD and pumped in one other $3.5 billion when the first care operator acquired specialty and pressing care enterprise Summit Well being-CityMD. When corporations spend billions on development initiatives as Walgreens has, that may put a pressure on their money circulation.
The large drawback is that Walgreens would not have a giant buffer between its free money circulation and what it pays out in dividends. Final quarter, that distinction was detrimental, which means that the corporate paid extra out in dividends than what it generated in free money circulation.
Fundamental Chart information by YCharts
If this continues, it might be a troubling development for the enterprise. On the very least, these are figures that traders needs to be paying shut consideration to sooner or later.
Is a dividend minimize inevitable?
A dividend minimize could be a drastic transfer for Walgreens to make. Not solely would that destroy its streak of dividend will increase, but it surely may mark a major shift in priorities for the corporate, pivoting extra towards development and being much less centered on the dividend.
Previously 5 years, Walgreens has already began to reduce its charge of dividend will increase:
WBA Dividend information by YCharts
Final 12 months, the corporate made a razor-thin improve to the dividend, from $0.4775 to $0.48, which is only a 0.5% improve. In 2019, nonetheless, the corporate raised its payout by 4%. And the 12 months earlier than that, it made a beneficiant 10% improve.
If Walgreens tightens up its dividend “development” anymore, it should begin carrying a fifth decimal place when it pronounces its payouts.
Do you have to purchase Walgreens inventory?
Walgreens remains to be technically a dividend development inventory, however simply barely. Until the enterprise drastically improves and begins producing extra cash, these minimal charge hikes are more likely to proceed. And at this level, there’s little motive to anticipate issues will get higher when it comes to money circulation.
The healthcare stock could be a good contrarian choose, however provided that you anticipate its healthcare enterprise to achieve success — it incurred an working lack of $472 million for the three-month interval ending Feb. 28 and has a protracted solution to go to turn out to be worthwhile. In case you’re shopping for the inventory primarily for its dividend, you would find yourself disenchanted. Whereas I do not assume Walgreens will minimize its dividend inside the subsequent 12 months or two, it is a chance that traders ought to put together for, particularly because it spends extra money on healthcare growth. Although it may look like a bargain, Walgreens is presently a dangerous dividend inventory to personal.
David Jagielski has no place in any of the shares talked about. The Motley Idiot recommends Intel and recommends the next choices: lengthy January 2023 $57.50 calls on Intel and lengthy January 2025 $45 calls on Intel. The Motley Idiot has a disclosure policy.