Walgreens Earnings Beat Expectations, but Dividend Slashed, Stock Plunges.

Adjusted earnings for the first quarter of Walgreens’ fiscal year, disclosed along with the news of the dividend cut, were 66 cents a share, beating the 62 cents a share consensus estimate among analysts tracked by FactSet, and down from $1.16 a share in the same quarter last year. Sales were $36.7 billion, slightly above the FactSet consensus estimate of $34.9 billion.

The company announced a quarterly dividend of 25 cents a share, down from the previous quarter’s dividend of 48 cents. Walgreens has paid a consistent dividend for the past 91 years. The stock had a notably high dividend yield of 7.5% as of Wednesday, before the cut was announced.

“When I first joined, I think I made the comment that everything is on the table,” Walgreens CEO Tim Wentworth told Barron’s. He said that the dividend cut would allow the company to invest, and to potentially pay down debt, and that the company’s dividend yield would remain competitive with its peers.

“From our perspective, while not an easy decision, it’s going to enable us to have a bit more flexibility from the capital standpoint,” Wentworth said.

Analysts generally praised the decision to cut the dividend early Thursday. In a note to investors, RBC Capital Markets analyst Ben Hendrix said he was “pleased” by the dividend reduction, saying that the company’s cash flow had been ”near break-even,” and that the cut would improve the company’s cash position.

“A dividend cut is prudent at this time,” Hendrix wrote.

In a separate note, Evercore ISI analyst Elizabeth Anderson wrote that the dividend cut should save the company roughly $800 million annually.

Walgreens shares jumped 31% in December, after a dismal, multiyear selloff that had brought the stock’s price below $20 per share. Even taking into account the December bump, the stock fell 62% from 2019 through the end of 2023, a period in which the
S&P 500
rose 90%.

On Wednesday, the day before the earnings, Walgreens shares dropped 4.1%, the day’s worst performance by a component of the
Dow Jones Industrial Average.

The earnings report is the first under Wentworth, a former
Cigna
executive who arrived in October.

Wentworth faces a significant challenge at Walgreens, where operating income from the company’s core U.S. retail pharmacy business has dropped precipitously in recent years, amid changes in shopping habits, and challenges to the business model behind the company’s thousands of pharmacy counters.

Efforts to unload its U.K. pharmacy chain Boots failed in 2022, and while the company has spent heavily on bulking up its healthcare services offerings, that business isn’t yet turning a profit.

In his interview with Barron’s, Wentworth said that the future of Boots was one among many matters under consideration at the company. Late last year, the company struck a deal that allowed it to offload billions of dollars in Boots pension liabilities. Wentworth said the agreement positions Walgreens  “to look at Boots, as we are looking at everything else in the portfolio, to say what is the most shareholder appropriate and friendly thing to do with this very high performing asset?“

Walgreens said Thursday it was maintaining a forecast that adjusted earnings will come in at between $3.20 and $3.50 per share in its 2024 fiscal year.

Adjusted operating income for its U.S. retail pharmacy division was $694 million for the quarter, compared with the $672 million FactSet consensus estimate.

Speaking to Barron’s, Wentworth said that the company is focused on paying down debt, after Moody’s Investor Service slashed its credit rating in December. “We are on the path to redemption there,” Wentworth said. “And therefore, among the things that we will be doing is opportunistically buying back debt in the open market, as well as paying back debt when we can.”

The December run-up in Walgreens’ share price came after competitor
CVS Health
said in early December it would change how its pharmacies contract with the pharmacy benefit managers that pay for prescription drugs, opting for a new simplified model based on the cost of the drug plus a set markup. Analysts and investors have speculated as to whether Walgreens might adopt a similar strategy, which might ease some of the contracting pressure that has squeezed the profitability of the pharmacy counters at U.S. retail pharmacies.

Wentworth told Barron’s that Walgreens was “more than willing” to adopt a similar model, if the PBMs want that. “We like the patient experience that gets created by this,” Wentworth said.

“There’s been a lot of talk in pharmacy services broadly about transparency and pass through over the years,” he said. “I think that that really interesting thing now is there feels like there’s some pull here.”

Wentworth said that the cost-plus contracting model is “very good,” but that while it may become prevalent, it won’t do so quickly.

Wentworth warned that the rest of the year will be challenging for Walgreens. “We are not declaring any victory here, just because we basically did what we said we would do in the first quarter,” he said. “The board has given this team a great deal of confidence and flexibility to examine everything and do the right thing.”

Write to Josh Nathan-Kazis at [email protected]