Down about 65% in 2024, is Walgreens stock a bearish buy?

If you’ve researched the markets to buy high-yielding dividend stocks, you’ve probably noticed Walgreens Boots Alliance (WBA) offers the highest yield among stocks in S&P 500 index.

The company behind major drugstore chains in the US and Europe has cut its quarterly dividend to $0.25 this year, but its stock price has traded below $10 a share. As a result, investors who buy at recent prices could receive a dividend yield of more than 10% on their initial investment.

Buying top stocks when they’re out of favor is one way to beat the market, but investors who try to catch falling knives often get cut to ribbons. Here’s a closer look at why Walgreens got knocked down and its path forward to see if it’s a smart buy right now.

Why Walgreens Stock Is Falling

Walgreens shares tumbled 64.6% from the end of 2023 through the end of August. The stock is falling as its chain of retail pharmacies has underperformed amid pressure from online retailers and pharmacy benefit managers (PBMs).

Walgreens’ US drugstore operation grew sales by 2.3% in the fiscal third quarter ended May 31. The stock is hammered because the profit it gets when it fills prescriptions has evaporated. Third-quarter adjusted operating income in the segment fell 47.9% year-over-year to $501 million.

Three PBMs handle approximately 80% of all prescriptions filled in the United States. All of the top six PBMs operate mail-order and specialty pharmacies that compete with Walgreens. leading PBM, CVS Healthowns and operates a leading chain of retail pharmacies. Walgreens doesn’t own a PBM, so expecting profit margins to return to its pharmacy segment seems wishful thinking.

In addition to the contracting margin of its pharmacy business, Walgreens’ attempt to become a leading healthcare provider through its VillageMD joint venture with Swan it was a disaster.

In 2022, VillageMD paid $8.9 billion for Summit Health-CityMD, which expanded its coverage to more than 680 provider locations. In March, VillageMD took a $12.4 billion impairment charge, of which Walgreens absorbed $5.8 billion. The US healthcare segment posted an adjusted operating loss of $151 million in the first nine months of 2024.

How Walgreens Could Come Back

PBMs collect rebates from pharmaceutical companies in exchange for preferred placement on their formularies. The Anti-Kickback Statute is a federal law from 1972 and would make the rebates that PBMs rely on illegal if not for the protection of a safe harbor.

In July, the Federal Trade Commission (FTC) released a scathing report on the PBM industry that suggests a lawsuit is around the corner. It’s a long shot, but in theory, an FTC victory, a removal of the PBM industry’s safe harbor protections, or both, could allow Walgreens to compete with pharmacies more directly tied to PBMs.

It could be years before the government takes any action on the PBM industry, but Walgreens’ US healthcare segment is now approaching profitability. The company narrowed its healthcare segment’s adjusted operating loss to $22 million in the fiscal third quarter from $172 million in the year-ago period.

A recent internal analysis found that 75% of Walgreens’ US stores contribute 100% of that segment’s adjusted operating income. Future closures of underperforming stores could go a long way toward improving profitability.

A buy now?

Management cut its full-year earnings outlook to a range of $2.80 to $2.95 per share when it reported third-quarter results. Walgreens shares have been knocked down so far, trading at just 3.2 times the midpoint of management’s recently lowered estimate.

Investors who buy Walgreens stock at a very low valuation could come out ahead long-term, even if earnings stagnate. With a healthcare segment approaching profitability, it’s easy to see why investors with a high risk tolerance might want to take a chance on this stock.

Before you open your brokerage to buy Walgreens, you should know that CEO Tim Wentworth admitted on his last conference call that the current pharmacy model is not sustainable. Quick action by the government might help, but that’s a long shot that doesn’t factor in any sensible investment strategy. For most investors looking for income, it’s best to watch this company’s unfolding story from a safe distance until we’re sure its US pharmacy business can recover.