Investors holding onto their Walgreens Boots Alliance shares faced tough news last week when the pharmacy giant announced the suspension of its dividend. This decision comes roughly a year after Walgreens halved its dividend, adding to a string of challenges for the company. Over the past year, shares have plummeted 56%, with Walgreens grappling with dwindling reimbursement rates for prescriptions and a drop in consumer spending.
Highlighting the situation, Don Bilson from Gordon Haskett’s event-driven research pointed out that with Walgreens’ shares trading at $11 and facing various obligations, a significant dividend cut seemed inevitable. However, the complete suspension was unexpected.
It isn’t uncommon for companies to reinstate dividends. Howard Silverblatt from S&P Global noted that most of the S&P 500 companies that paused dividends during the Covid crisis have since resumed them. Despite this, when a company takes such a step, shareholders face a dilemma.
Kim Abmeyer, from Abmeyer Wealth Management, stressed that once a dividend is suspended, investors must reassess their priorities. If generating income is the main goal, it might be wise to divest and pursue other options.
Typically, a dividend suspension is a major warning sign for investors. According to Silverblatt, this action signals underlying cash-flow issues, although it shows that the company is striving to tackle its problems, which can sometimes lead to a rise in stock value upon announcement.
Silverblatt advised keeping an eye on high dividend yields and cash flow deterioration as warning signs. A high yield could indicate falling share prices, while cash flow troubles may question dividend sustainability. Headlines can also be critical, as negative news should prompt investors to evaluate their positions, emphasized Abmeyer, who exited from Intel when it announced a dividend suspension last August. This move was wise, considering Intel’s shares dropped 55% over the past year.
Abmeyer explained that dividends often bolstered investors’ confidence to weather market storms but, if prospects remain bleak, cutting losses and refocusing on original investment goals might be prudent. The response to a dividend suspension varies based on an income investor’s strategy and objectives.
Ashton Lawrence from Mariner Wealth Advisors advocates against hastily swapping stocks purely for yield. Instead, reassessing the broader income strategy might involve diversifying among high-quality dividend payers, considering alternative income avenues such as structured notes or bonds, or focusing on a total return approach balancing income and capital appreciation.
To preempt difficulties, thorough due diligence on dividend stocks is essential. Investors should scrutinize not just balance sheets and cash flows but also earnings consistency and dividend payout ratios. Lawrence warns that a high payout ratio could be alarming if a company distributes most earnings as dividends, leaving little room for downturns. He also evaluates a company’s industry positioning, debt levels, and dividend growth history.
Investing through a diversified ETF like the S&P 500 Dividend Aristocrats ETF (NOBL) could be beneficial, including firms with a quarter-century track record of dividend growth, like Walmart, IBM, and Coca-Cola. Lawrence underscores the value of diversification, ensuring income sources from bonds, dividends, and income notes remain robust.
