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In this video, we perform a deep dive on Walgreens’ dividend safety.

To begin, let’s talk about Walgreens’ business model. Walgreens Boots Alliance is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures (including equity investments), Walgreens has a presence in more than 25 countries and employs more than 385,000 people. In its leading retail pharmacy business, Walgreens operates approximately 13,200 stores in 11 countries. The company also operates one of the largest global pharmaceutical wholesale and distribution networks, with more than 390 centers that deliver to upwards of 230,000 pharmacies, doctors, health centers, and hospitals each year. Walgreens operates in three financial segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale.

Walgreens is a well-known dividend stock because of its compelling track record of dividend growth. With 42 years of consecutive dividend increases, Walgreens is a member of the Dividend Aristocrats Index, a group of elite dividend stocks with more than 25 years of consecutive dividend increases. You can download our free list of Dividend Aristocrats here: https://www.suredividend.com/dividend...

Walgreens Dividend Safety Relative to Earnings

First, let’s discuss Walgreens dividend safety in the context of the company’s current earnings.

When Walgreens announced its fourth quarter and full year financial results on October 11th, the company reported that it generated full year adjusted earnings-per-share of $6.02. During the same time period, Walgreens paid $1.64 of common share dividends for a payout ratio of 27%.

Using earnings, Walgreens’ dividend appears very safe for the foreseeable future.

Walgreens’ Dividend Safety Relative to Free Cash Flow

Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare Walgreens’ current dividend payment to its free cash flow.

In fiscal 2018, Walgreens generated $8.3 billion of cash from operating activities and spent $1.4 billion on capital expenditures for free cash flow of $6.9 billion. During the same time period, the company spent $1.7 billion on common share dividends for a free cash flow dividend payout ratio of 25%.

Using free cash flow, our conclusion is the same. Walgreens’ dividend appears safe for the foreseeable future, and its payout ratio using free cash flow is actually lower than the earnings-per-share equivalent.

Walgreens’ Dividend Safety Relative to Recession Performance

Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze Walgreens’ current dividend safety in the context of the company’s historical recession performance.

We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. Walgreens’ performance during this time period is shown here:

• 2007 adjusted earnings-per-share: $2.03
• 2008 adjusted earnings-per-share: $2.17
• 2009 adjusted earnings-per-share: $2.02
• 2010 adjusted earnings-per-share: $2.64
• 2011 adjusted earnings-per-share: $2.53
• 2012 adjusted earnings-per-share: $2.90

Walgreens’ earnings-per-share performed very well during the last economic contraction. Accordingly, we have no concerns about the company’s ability to pay rising dividends during future economic downturns.

Walgreens’ Dividend Safety Relative to Its Current Debt Load

The last angle that we will use to assess Walgreens’ current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s free cash flow will no longer cover its dividend payment.

In fiscal 2018, Walgreens generated $616 million of interest expense and had $14.4 billion of total debt for a weighted average interest rate of 4.3%.

The following image shows how changes to Walgreens’ weighted average interest rate would impact the company’s dividend coverage, as measured by free cash flow.



As the image shows, Walgreens’ weighted average interest rate would need to rise well above the 20% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that Walgreens’ debt level is unlikely to impact the safety of its dividend moving forward.