1 medical stock to sell now and never look back

If you own shares of Walgreens Boots Alliance (WBA -1.51%) hoping it turns around quickly, I think now is the time to cut your losses on the struggling drugstore chain and allocate your capital elsewhere. Here’s why.

A common investment thesis for this stock is now dead

One of the criteria that can help an investor decide when to sell a stock is whether the investment thesis he formed as a rationale for buying the stock is still valid.

Let’s say you bought Walgreens stock 10 years ago, expecting it to be a safe stock that would generate steady and growing dividend income and modest stock price appreciation. He may also have anticipated that his line of business, the provision of retail pharmacy services, would hold up relatively well over time, even if the world changed a great deal.

But that thesis didn’t go as planned.

Over the past 10 years, total stock returns have fallen by just over 80%. During the same period, quarterly free cash flow (FCF) fell 53% to just $327 million. In early January of this year, Walgreens cut its quarterly dividend by 48% from the previous quarter to $0.25 per share.

And in the past 12 months alone, the company has spent nearly $27 billion paying down debt, refusing to use that capital for growth initiatives or returning it to shareholders.

So, to recap: It wasn’t a safe investment, it didn’t offer consistent dividend income, and while people still have to go to a pharmacy to get their prescriptions, it seems that this factor wasn’t relevant to holding onto the stock. price.

Moreover, it is not where the pharma industry as a whole struggled, which would at least be some consolation for the stock’s underperformance. Walgreens’ biggest competitor, CVS Healthhas seen its total stock return fall by about 4% over the past 10 years, while FCF and quarterly dividends have risen. Take a look at this chart:

WBA Total Return Level data by YCharts.

So what is Walgreens dipping? Its core prescription refill segment continues to hold up relatively well, expanding the number of prescriptions (excluding immunizations) filled by 1.7% year-over-year through the fiscal third quarter (which ended May 31).

But sales of over-the-counter medical products are dwindling, as are prescription reimbursements from insurers. The boost the company received as the economy reopened in 2021 is long gone. More importantly, its attempt to diversify into providing primary care is expensive and, while no longer cash-burning, still nowhere near contributing enough to support the top or bottom line.

There is no concrete hope of salvation on the horizon. The only way forward in the short term will be for Walgreens to continue selling its investments and other assets to pay down its debt, while reducing operating costs and pushing forward in its most profitable segments. Such moves could cause it to leave some revenue on the table. And its total assets will likely continue to decline, further dragging down the stock price.

Even if you’re patient, it’s time to sell

It’s true that Walgreens could save itself in the next decade or more. Finally, its primary care segment could be a formidable profit center. And its retail pharmacy segment could become efficient again, given enough time.

But there’s still not much evidence that these processes go much beyond the starting line. Nor are shareholders required to sit around after their investment thesis is invalidated, regardless of the precise reasons.

Therefore, I think the best move is to sell the stock now. Even if you’re bullish on a recovery — and it’s hard to see why at this point — a bigger downside move in stocks could be looming. It’s safer to back out now and then come back later if you detect the seeds of a restoration.