Walgreens Boots Alliance (NASDAQ: WBA) is a household name in healthcare. Consumers in America and worldwide have been visiting their neighborhood pharmacies for generations.
However, the company has fallen on hard times. Clumsy attempts to expand the company sank the balance sheet and caused a 90% drop from the stock’s high.
Efforts for a turnaround have begun. Management is removing debt from the balance sheet and there is hope for an eventual return to earnings growth. Investors today are looking at a beaten stock with an 11% dividend yield that could be a big winner a millionaire maker when Walgreens gets back on its feet.
But is that likely? Or has the industry passed Walgreens by?
Walgreens Boots Alliance is one of the world’s largest pharmacy companies. Ironically, the prescription drugs that consumers go to a Walgreens store (Boots in the UK) are simply the carrot to ingest. Pharmacies operate on razor-thin margins and make most of their profits by selling retail items, food and beverages as customers visit the stores. Walgreens generated nearly $116 billion in revenue from its U.S. pharmacies in 2024, but generated only $2.1 billion in operating income, a margin of 1.5%.
Competition from new sources, such as mail order and e-commerce threats, has put pressure on traditional pharmacies to expand their business models. For example, CFS health acquired health insurer Aetna in 2018. Walgreens chose to expand into healthcare services, an expensive and acquisition-intensive venture that ultimately, costs and balance sheets have increased dramatically.
Now the company is aggressively trimming fat. Management is reducing its balance sheet and cutting costs by closing its least profitable stores:
The worst could soon be over. Walgreens earned $2.88 per share in 2024 and expected earnings to fall to $1.40 on the low end for 2025. However, analysts estimate that the company will grow earnings at an average rate of 5% per year over the next three to five years, signaling a bottoming out and return to earnings growth.
Assuming Walgreens grows profits again, the investment thesis is attractive at first glance.
Walgreens trades at a price-to-earnings ratio of about 6 and a PEG ratio of 1.1. In other words, the stock’s valuation is attractive for the company’s expected earnings growth. Investors could hypothetically expect Walgreens stock to deliver investment returns comparable to the company’s total earnings growth and dividend yield, about 16% annualized.