Walgreen Boots Alliance (WBA) stock took a 12% dive this morning after the company beat analyst’s expectations for earnings and the stock’s prognosis is bad.
The company beat, but the devil behind WBA’s drop is going to rock the income investing world for a while.
WBA slashed its quarterly dividend by almost 50%.
Before the cut, the dividend generated a rich 7.5% annual yield. That yield put Walgreen’s in a class of stocks that outperformed yields offered by risk-free government treasuries.
The new lower yield is going to cause a lot of selling pressure over the next few months, as the income foragers move to other areas of the market. That includes the long-term bond market that is flirting with a new long-term bullish trend. Read more about that here.
Walgreens’ management says that the cut will free up capital to invest in its pharmacy and healthcare businesses.
There are two things wrong with that statement.
One, the playing field for pharmacies is getting tougher. Online delivery providers are taking market share squeezing margins for companies like Walgreens and CVS.
Two, Walgreens is a retail store, not a pharmacy, and their retail demographic is struggling. Just look at Dollar Tree (DLTR), Big Lots (BIG), and other discount retailers. That’s the fight that Walgreens’ management has on their hands.
Bottom Line
The stock bounced off its 50-day moving average today, as short-term traders are trying to call a bounce. My view of the chart sees a sub-$20 stock over the next month, as the income investing crowd moves out of this stock for greener pastures.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.