Walgreens experienced a significant decline in its stock prices on Friday, following the announcement that it would be halting its dividend payments. This marks the end of a remarkable history of consistent quarterly shareholder distributions that has lasted for over 90 years.
The drugstore chain revealed its decision late Thursday, explaining that the move was aimed at enhancing its financial stability and bolstering free cash flow as the company’s executives seek to revitalize a business facing challenges. Walgreens has been grappling with low prescription reimbursements, increasing operational costs, ongoing theft issues, and a consumer base inclined to seek discounts elsewhere. Currently, the chain is in the preliminary phases of a strategy to shut down approximately 1,200 of its 8,500 outlets in the U.S.
In a succinct statement released Thursday, Walgreens indicated that substantial anticipated cash outlays for litigation and debt restructuring contributed significantly to the decision to suspend dividend payments. Just earlier this month, the U.S. Justice Department lodged a lawsuit against Walgreens, accusing the company of dispensing millions of prescriptions, some of which included excessive opioid dosages, without a valid justification. Additionally, in September, Walgreens disclosed a settlement of $106 million to resolve litigation related to false payment claims.
The company began the previous year by nearly halving its quarterly dividend, slashing it from 48 cents to 25 cents, following dividend payments totaling around $1.7 billion in fiscal year 2023. Chief Financial Officer Manmohan Mahajan stated that the company was still reviewing the “appropriateness and size of our dividend” as part of its broader capital allocation strategy.
Analyst Michael Cherny from Leerink Partners characterized the suspension as both “prudent and somewhat overdue” in a research note on Thursday. He noted that the dividend had become disproportionate regarding the cash it demanded. Historically, dividend suspensions have been sparse; last year, just two companies in the S&P 500, including Intel, announced similar measures, typically indicating a broader reluctance among firms to suspend dividends.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, remarked that such a suspension sends an unambiguous message about a company’s struggles, especially concerning cash flow, which is not just a temporary setback. However, he mentioned that the initial market response to a dividend suspension can often be positive, as it indicates that the company is acknowledging its difficulties and taking proactive steps toward resolution.
Gabelli Funds portfolio manager Jeff Jonas projected last fall that further cuts to the dividend at Walgreens were imminent. He expressed optimism about the gradual improvement of the balance sheet but maintained that it still required additional enhancement.
Walgreens has proudly claimed to provide cash dividends consistently every quarter since 1933, marking an uninterrupted record that spans over 90 years, equating to nearly 370 consecutive quarters of payouts. Following the announcement, shares of Walgreens Boots Alliance Inc., headquartered in Deerfield, Illinois, plummeted by over 15% to $9.66 as the markets opened on Friday, despite broader market indexes registering slight gains. This decline erased a brief surge in the stock’s price after a previous positive earnings report. Since last spring, Walgreens shares have lost more than half their value and have been in a gradually declining trend for the past decade.
