Looking for income? This could be the dividend stock for you
I always get a little chill when I see a company’s quarterly dividend credited to my account. There’s something special about being rewarded for contributing your capital. And what’s better than having that feeling for years and years?
This is why I will suggest Walgreens Boot Alliance (WBA 0.52% ) like a killer dividend stock today. Between its proven retail drugstore business model and its ability to deliver quarterly payments to investors, there’s a lot to like about this title. Let’s analyze.
The winds of change are coming
Walgreens operates more than 13,000 retail pharmacies in the United States, Latin America and Europe. In the context of the pandemic, its stores are serving as outreach centers to administer coronavirus vaccines and diagnostic tests.
In addition to being an indispensable part of the consumer healthcare infrastructure in the United States, Walgreens also offers many of the foods, beverages, and hygiene items you’d find in a convenience store. Whatever groceries are on sale, people are sure to come back to have their prescriptions filled, and that’s one of the reasons that stock isn’t running out any time soon.
As a retailer, Walgreens’ profit margin is slim at 4.7%. But its revenue base is decidedly fat, with its 12-month total exceeding $134.9 billion. As you might have guessed, pharmaceutical retailers aren’t exactly growing like wildfire. Since 2013, its annual revenue has increased by only 84.9% and its annual earnings before interest, taxes, depreciation and amortization (EBITDA) have increased by only 5.2%.
This slow pace could change slightly for the better in the near future, as the company shifts to providing primary care and basic outpatient services in newly built locations next to its pharmacies. Management believes the new offerings will ultimately help accelerate its earnings per share (EPS) growth rate to between 13% and 15% over the long term. And with earnings expected to rise, the company should have plenty of cash to keep paying its dividend, which is one of the main draws for investors.
Currently, its dividend has a forward yield of just over 4%. More importantly, over the past 10 years, the dividend has increased every year without fail, with its payout increasing by 112% over that time.
In fact, Walgreens has increased its dividend every year for even longer than that — about 46 years in all. This makes a Dividend Aristocrat, one of an elite group (and just four years away from Dividend King status), something particularly attractive to potential buyers.
Have the right set of expectations
As great as everything about Walgreens seems to be, its action is not without its risks – and neither is its business inevitably doomed to success.
It’s not a stock that’s going to beat the market every year, as it’s unlikely to grow much. In short, to get the most out of it, you’ll need to hold onto it long enough, allowing the annual dividend increases to add up in your favor and drive down your costs. Of course, there’s no rule that says a long-term dividend payer will be able to keep paying.
While Walgreens’ annual free cash flow (FCF) has increased 68.4% over the past 10 years, its total annual long-term debt has also increased 66.5% over the same period, reaching $39.2 billion. In fiscal 2021, the company spent $15.2 billion paying down debt, but only paid $1.6 billion in dividends and reported just $4.1 billion. in FCF. Investors should therefore keep an eye on the company’s FCF over time if they plan to buy shares, as a decline could possibly portend difficulties in meeting debt obligations and pursuing the dividend.
Besides the sustainability of the dividends, there is also the question of how the company will fare in its attempts to diversify into providing primary care services in its pharmacies. Generally, it is reasonable to expect some margin compression when a new (and important) initiative is rolled out in a large organization like Walgreens. That could be a problem because there just isn’t a whole lot of profit margin to compress.
Still, if you’re interested in receiving a quarterly payment that’s fairly likely to be stable, Walgreens is a decent option. It could play a useful role in anchoring the value of your portfolio if you have the time to wait for it to pay off.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.