Why Walgreens’ Dividend Suspension Shouldn’t Come as a Surprise to Investors

Walgreens Boots Alliance (WBA -6.12%) faces an uncertain path ahead. Its financials haven’t been strong in recent years, and its struggling pharmaceutical operations face growing competition. While it is slashing its store count, there’s no surefire strategy that will turn the business around.

Shares of the pharmacy retailer haven’t been this low in decades. And while some investors may have been willing to just hang on to the stock amid the uncertainty and simply collect its dividend, now, even that is gone.

Walgreens’ dividend streak comes to an end

On Jan. 30, pharmacy retailer Walgreens announced that it was suspending its quarterly dividend. The company is refining its strategy as it looks to improve its financials amid a broader turnaround effort. By freeing up cash flow, the company can improve its balance sheet and reduce its debt.

It’s a big blow to investors as the company has been paying dividends for over 90 consecutive years. The dividend was a big reason investors bought shares of the business, even amid its struggles. A year earlier, the company made an already drastic move in slashing its dividend by 48%, but even that hasn’t been enough to really improve its financial position.

Why this shouldn’t come as a surprise to investors

The dividend suspension is bad news for investors but it shouldn’t be a surprise given Walgreens’ perilous financials. As of its most recent quarter, which ended on Nov. 30, 2024, Walgreens reported just $859 million in cash and cash equivalents, while its long-term debt totaled more than $7.6 billion. The company has been burning through cash from its day-to-day operating activities and it has struggled to stay out of the red.

Oftentimes, Walgreens paid out more in quarterly dividends than what it generated in free cash flow, which is seen in the chart below.

Data by YCharts.

This is unsustainable because the dividend has been draining a cash balance that isn’t all that large to begin with. Not only does Walgreens need to pay down its debt, but the company has also been piling money into a costly healthcare strategy, which involves opening up primary care clinics at its locations.

To turn its business around, new CEO Tim Wentworth has been considering a wide range of options. And unfortunately for investors who have come to rely on its dividend, even its payout isn’t safe.

Is Walgreens going in the right direction?

Walgreens grew its revenue by 7.5% year over year in its most recent quarter but the company still incurred a significant operating loss of $245 million, despite the massive $39.5 billion in revenue it generated. The company is still in the early innings of what may prove to be a very long turnaround strategy.

By suspending the dividend, management is showing investors that it’s not scared of making big moves that may be necessary to improve cash flow, even if they may be unpopular ones. Unfortunately, it’s still too early to tell if these efforts, which include closing more than 1,000 stores, will pay off in the end.

Walgreens stock has lost 81% of its value over the past five years and its beaten-down valuation may attract some investors who are willing to gamble on the healthcare stock. But at this stage, a wait-and-see approach with the stock may make the most sense given the risk involved.