Shares of Walgreens Boots Alliance(NASDAQ: WBA) rocketed 27.5% higher on Friday, Jan. 10, 2024. This isn't nearly enough to recover from a 64% drop the stock notched last year, but it's a big step in the right direction.
Investors of all stripes are wondering whether more gains could be ahead for the beaten-down retail pharmacy chain operator. Income-seeking investors are particularly interested because, despite the recent run-up, shares of Walgreens Boots Alliance have been offering an eye-popping 8.5% dividend yield.
Can Walgreens Boots Alliance stock continue rising, or should investors use the stock's recent gain as an opportunity to exit? Let's look at what the pharmacy chain operator said in its latest report to see whether it's time to buy, sell, or hold the ultra-high-yield dividend stock.
Why Walgreens stock shot higher
During its fiscal first quarter that ended on Nov. 30, 2024, adjusted earnings came in at $0.51 per share. This is less than half the amount it was earning a couple of years earlier but heaps more than the Wall Street consensus estimate of just $0.40 per share.
In addition to a better-than-expected fiscal first quarter, Walgreens issued forward-looking guidance that was a little rosier than anticipated. While the average analyst expected the company to predict earnings to reach $1.58 per share in fiscal 2025, management issued a guidance range of between $1.40 and $1.80 per share.
Citing surprisingly strong results from its retail operation, Evercore analyst Elizabeth Anderson raised her bank's price target to $12 from $9 per share. The adjustment is a step in the right direction, but the new target isn't far from the stock's closing price of $11.75 on Jan. 10.
Reasons to be cautious
Anderson and her peers were surprised by Walgreens' recent results, but the company has done little to address the main issues pressuring the retail pharmacy industry as a whole. According to a report from the Federal Trade Commission, pharmacy benefits management (PBM) operations from just three companies, CVS Health, UnitedHealth Group, and Cigna, manage 79% of prescription drug claims for 270 million Americans.
All three of the big PBMs are vertically integrated with managed care providers and mail-order pharmacies. After seeing said providers, many of their members get prescriptions filled by mail-order pharmacies run by the same company that collects their insurance premiums. Walgreens doesn't have an integrated PBM, and its U.S. pharmacy operation is suffering as a result.
Cheap generic drugs used to be a great source of profits for retail pharmacies. Unfortunately, for Walgreens, the soaring popularity of Mark Cuban's Cost Plus Drugs and its transparent business model made dispensing generic drugs a low-margin business. To compete with low-cost providers, such as Amazon Pharmacy and Cost Plus Drugs, CVS Health recently converted its commercial pharmacy contracts to a similar model it calls CostVantage.
Buy, sell, or hold?
Despite pressure from pharmacies vertically integrated with health insurers, Walgreens reported fiscal first-quarter U.S. retail pharmacy sales that rose 6.6% year over year. While sales from this important segment are growing, margins declined again. Adjusted operating income from U.S. retail operations came in at just 1.3% of sales, down sharply from the 4% margin the company reported two years earlier.
Declining U.S. pharmacy margins could be a huge problem because Walgreens' nascent U.S. healthcare segment is still bleeding money. The company's U.S. healthcare operation lost $325 million in the fiscal first quarter, which led to an overall operating loss of $245 million for the three-month period.
An eye-popping dividend yield above 8% at the moment is tempting. Without any profits to distribute, though, another deep dividend slash could be in this stock's future. It's probably best to watch from the sidelines until its bottom line is firmly in positive territory again.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Cory Renauer has positions in Amazon and CVS Health. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
