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For the sake of its long-term health, Walgreens has ripped off the Band-Aid.
The retail pharmacy giant made headlines earlier this month upon announcing it nearly halved its dividend. Tim Wentworth, chief executive of Walgreens Boots Alliance, said in a statement the move allows the company “to invest in sustainable growth initiatives in our pharmacy and healthcare businesses, which we believe will ultimately improve shareholder value.” The statement didn’t name specific initiatives.
Walgreens reported $36.71 billion in quarterly revenue, beating estimates by roughly $1.85 billion, according to CNBC. It also reported a net loss of $67 million, compared to $3.7 billion the same quarter a year prior after the company paid out a multibillion settlement over its role in the opioid crisis. Sales were up 10% year over year to $36.7 billion.
By taking a scalpel to its dividend payouts, Walgreens is saving a huge chunk of change. How much? About $800 million annually, according to a Barclays earnings review that the firm provided to CFO Brew. While the cut may raise the blood pressure of some investors, it earned the praise of Barclays.
“That’s a pretty bold move for a brand new, incoming CEO,” Stephanie Davis, managing director at Barclays who leads its equity research on the US healthcare technology and digital health sector, told CFO Brew. “[It] does show that he’s very willing to do whatever it takes to preserve that investment-grade rating. While that’s not going to be wonderful for the stock immediately when you do cut the dividend, it affirms [what] he’s focused on, [what] he’s executing, and there’s a lot of value to that.”
Barclays noted additional actions Walgreens may do in prioritizing cash sustainability.
“All told, we have a positive view on management reiterating their commitment to cash sustainability and believe there are numerous opportunities for cash improvement (further capex reductions, a potential monetization of Boots, and further COR sales),” according to the Barclays report.
Wentworth told CNBC that most investors are “excited about the fact that we’re going to have additional capital to invest in the core business in a way that stimulates growth again, because that ultimately is going to be the most shareholder-friendly thing we can do.”
The dividend cut is just one prescription that new Walgreens management has written to revitalize the company.
Walgreens is also shifting to a cost-plus model that, according to the Barclays report, will “ease reimbursement pressure concerns.” And the company announced last October that it would close 60 VillageMD clinics in what Wentworth called “non-strategic markets” during a recent earnings call. Its core business strategy moving forward will feature “less capital-intensive” assets like Pearl Health and CareCentrix, according to Barclays.
US pharmacy sales increased last quarter, though retail sales were down. Walgreens management cited challenges including macroeconomic conditions, less consumer discretionary spending, a mild start to the cold and flu season and retail shrinkage.