How Low Can Walgreen's Boots Alliance Go?

Key Points

• Walgreen's Boots Alliance Inc. had a mixed quarter and guided the market lower. 
• The implication for the broad market could be tremendous and suggests another downtick in the EPS outlook. 
• Weakness is priced into the market, making the dividend an attractive play for risk-tolerant income investors. 

Walgreen's Boots Alliance Inc. NASDAQ: WBA has trended lower since 2015 and could go lower. The Q3 results are mixed, but the guidance for Q4 and 2024 is weak. The caveat is that Walgreen's Boots Alliance stock may be at or near its bottom. The stock, accounting for the negative 7.5% post-release plunge, is trading at the lowest levels since 2012, and the business is far better than at those times. 

Consider that Walgreen's results and guidance aren't that surprising. The economic environment is shifting; the downward revision to the outlook is part and parcel of the conditions. Inflation and high interest rates cut into consumer budgets. The more interesting question is what this means for consumer spending in general, the outlook for S&P 500 earnings, and the stock market's direction. 

The analysts' consensus figures for second-half earnings growth are positive for the broad S&P 500. The caveat is that the consensus has been trending lower and will likely continue to do so despite the influence of AI on the tech sector. The data for the past few years shows that analysts are hesitant to revise the long-term outlook, which you can see in the trend in sentiment. As each reporting season begins, peaks and ends, the outlook for the next quarter or two declines. 

Walgreen's results are consistent with that trend and suggest it will continue. If so, that will put the third-quarter consensus in negative territory, not a catalyst for higher market prices. Walgreen's, which yields over 6% and has a solid track record of distribution increases, is already trading at rock-bottom prices and yields more than treasuries.

Walgreen's Has Mixed Quarter, Lowers Guidance

Walgreen's had a mixed quarter with declining COVID-19 sales, growth investments and a weaker-than-expected allergy season impacting the results. The company reported $35.42 billion in net revenue, a gain of 8.7% over last year. The revenue topped consensus by 380 basis points and growth on the bottom line. The gains were driven by strength in retail pharmacy and the International segment and aided by solid results in the newer U.S. health segment. The bottom line growth was a little weaker than expected, about 3.5% compared to an expected 8% to 10%, primarily due to COVID-related deleveraging and a more cautious consumer. 

The guidance is what got the market's attention. The company lowered its guidance for earnings by 60 cents at the top end of the range and 40 cents at the bottom. That puts earnings well below the Marketbeat.com consensus, and the preliminary outlook for 2024 is also weak. The preliminary 2024 outlook calls for growth but low to mid-single-digit earnings growth following a weaker-than-expected 2023. 

Walgreen's Dividend: How Safe is it? 

Walgreen's dividend is safe enough, but there are risks, and you can never fully discount a cut. The impacts of opioid settlements, COVID-related deleveraging, growth, and turn-around efforts cut into cash flow, FCF and available cash, but these headwinds are subsiding. The $1.92 payout is about 48% of earnings at the low-end range, which is manageable given the outlook. Don't expect significant increases — there is a chance Walgreen's could stop making annual increases. 

The charts are iffy. The stock is in a pronounced downtrend, but the monthly, weekly, and daily charts suggest the downtrend is overextended. It does not guarantee a bottom, and a reversal could be far off, but the downside risk appears limited. The analysts are still holding and see the stock trading at least 20% higher than it is now.