High-Yielding Walgreens Boots Alliance Goes On Sale

Deep-Value Walgreens Boots Alliance COVID Tailwind Weakens 

Shares of Walgreens Boots Alliance NASDAQ: WBA imploded in the wake of what were otherwise stellar results and guidance because of COVID. The company didn’t catch COVID and there weren’t any major COVID-related shutdowns which is ultimately the problem. The company’s growth and earnings have been supported in large part by COVID-19 testing and vaccinations and those numbers are falling off considerably. Not only are most Americans vaccinated (the company's largest and primary market) but the rate of COVID infections fell drastically in the wake of Omicron along with general fear of the illness. While COVID is still present and still fueling vaccination and testing sales the tailwind is weakening which forces the company to rely on its own abilities to fuel growth.  

Walgreens Boots Alliance Beats, Provides Positive Guidance 

As worrisome as slowing growth can be, the selloff in Walgreens Boots Alliance was not warranted given our view of the earnings and outlook. While neither was truly market inspiring, both were better than the Maketbeat.com consensus estimate which is no reason for investors to run for the hills. On the top line, the company reported $33.76 billion in net revenue for a gain of 3.0% over last year. This is 130 basis points better than the consensus estimate and fueled by a 3.0% comp and strength in both key markets. In the US, retail sales rose by 15% while in the UK they rose by a stronger 22% to drive margin improvement as well. 

Moving down to the earnings, the company’s adjusted earnings grew nearly 36% due to revenue strength, leverage, and internal efforts to reinvigorate growth. The net income is down, however, due to investments in company operations and growth and produced a slight decline in the GAAP earnings. The adjusted earnings, however, came in at $1.59 or up 26.5% from last year and beat the consensus by $0.19 or 1350 basis points. 

The guidance is tepid in that execs only reiterated their previous expectations but those expectations are calling for growth in the face of analysts' forecasts for contraction. Walgreens execs are expecting earnings growth in the low single digits versus an expected decline of 5.0% but there is some risk here. If the guidance is the same and FQ2 earnings were above expectation the following quarters could be weaker than previously forecast and another reason why shares are falling. 

Walgreens Boots Alliance Is A Healthy Dividend 

Walgreens Boots Alliance is not only a high-yielding stock but it is a healthy payer and one trading at a deep discount to the broad market. The stock is yielding over 4.0% with shares trading near $45 which is less than 10X its earnings. The payout is also less than 35% of the earnings and the balance sheet is solid and improving giving no reason to fear there won’t be another distribution increase this year. The company has been increasing the payout for the last 7 years and we think it can continue for another 7. 

The Technical Outlook: Walgreens Boots Alliance Falls To Support 

Walgreens shares fell more than 5.0% on the earnings news and outlook but may have already hit bottom. Price action is showing support at the key $45 level that has been in place for the last year or so. If price action falls below this level it may move down to the $40 range but we don’t see this happening now, not with the institutions buying the stock as they have been over the past year. The institutions have bought more than 3.5% of the market cap over the past year and now own more than 56% of the stock. Assuming price action can maintain a floor above $45, we see this stock moving sideways within the $45 to $52 range.