Here's Why We're Wary Of Buying Walgreens Boots Alliance's (NASDAQ:WBA) For Its Upcoming Dividend

By
Simply Wall St
Published
November 13, 2020
NasdaqGS:WBA

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Walgreens Boots Alliance, Inc. (NASDAQ:WBA) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 18th of November in order to receive the dividend, which the company will pay on the 11th of December.

Walgreens Boots Alliance's next dividend payment will be US$0.47 per share. Last year, in total, the company distributed US$1.87 to shareholders. Calculating the last year's worth of payments shows that Walgreens Boots Alliance has a trailing yield of 4.6% on the current share price of $40.77. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Walgreens Boots Alliance has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Walgreens Boots Alliance

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Walgreens Boots Alliance paid out a disturbingly high 355% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Walgreens Boots Alliance generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 43% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Walgreens Boots Alliance fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NasdaqGS:WBA Historic Dividend November 13th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Walgreens Boots Alliance's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 34% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Walgreens Boots Alliance has delivered 13% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Walgreens Boots Alliance is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Walgreens Boots Alliance got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 355% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Walgreens Boots Alliance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Walgreens Boots Alliance. Every company has risks, and we've spotted 4 warning signs for Walgreens Boots Alliance you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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