When an organization is in a troublesome financial situation, all options are on the table. For the sake of keeping its operations afloat and ensuring its long-term safety, an organization may drastically cut expenses and even abandon once-promising growth opportunities. Money comes first.
Walgreens Boots Alliance (NASDAQ: WBA) is an organization which may be in urgent need of strengthening its money position. Its money flow is not great, it’s still paying a dividend, and investors have simply been losing hope in the corporate in consequence of its underwhelming financials. Not only is it considering asset sales, but it surely’s also contemplating a major move: dumping its stake in VillageMD.
Walgreens has invested billions into its healthcare strategy
In 2021, Walgreens took a majority stake in primary care operator VillageMD when it made a $5.2 billion investment in the corporate. The move was a strategic one, which involved plans to launch 1,000 health clinics by 2027. Walgreens hoped to money in from its position of being a trusted neighborhood pharmacy for tens of millions of Americans.
By launching health clinics at its existing locations, the concept was to incentivize shoppers to go to pharmacies more often and ultimately spend more, driving higher revenue. A yr later, VillageMD announced plans to amass Summit Health, a medical practice, with Walgreens helping to fund the near-$9 billion purchase, adding one other $3.5 billion to its investment in the first care company.
But the expansion strategy hasn’t been smooth. In Walgreens’ most up-to-date quarterly results, which led to May, it incurred an operating lack of $220 million in its U.S. healthcare segment, which incorporates VillageMD’s results. It was the one certainly one of Walgreens’ principal segments that incurred a loss in the course of the period. And earlier this yr, Walgreens wrote down its investment in VillageMD by nearly $6 billion.
Will Walgreens dump its entire stake in VillageMD?
In a recent filing, Walgreens has indicated that it’s contemplating the “sale of all or a part of the VillageMD businesses, possible restructuring options and other strategic opportunities” because it notes that there are “substantial ongoing and expected future money requirements.” This comes as VillageMD has defaulted on a $2.25 billion loan facility that Walgreens provided the first care operator with.
For Walgreens to undergo with selling its position in VillageMD would undoubtedly be a major one as it will signify an enormous change in its growth strategy. But given the challenges VillageMD is facing and the already significant writedown Walgreens has recognized, it’s debatable just how much a sale might herald for the business. Nevertheless, by simply abandoning this cash-intensive strategy, Walgreens could put itself in a greater financial position in the long term.
Investors may recall that earlier this yr, low-cost operator Walmart announced it will abandon its healthcare strategy after concluding it was too difficult and expensive to compete in. If a deep-pocketed company like Walmart struggled to supply low-cost healthcare options, it’s definitely not a very good sign for Walgreens.
Investors should hold off on buying Walgreens stock
On the profitability front, Walgreens continues to be juggling with various business segments, and unfortunately, a variety of balls are still within the air. THere’s no clarity what Walgreens may or may not find yourself doing. Even when it sells its stake in VillageMD, that will not necessarily solve all of its problems. Margins remain low, growth is sort of non-existent, and the dividend looks unsustainable.
Walgreens stock is down around 60% this yr, but until the business shows a major improvement in its financials and it has higher prospects for profitability and growth, investors are still higher off avoiding the healthcare stock because it’s likely far too dangerous for many portfolios.
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David Jagielski has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Walmart. The Motley Idiot has a disclosure policy.
Walgreens Is Reportedly Considering a Drastic Move to Improve Its Money Flow was originally published by The Motley Idiot