We recently compiled a list of the 10 Best Beaten Down Dividend Stocks to Invest in Now. In this article, we are going to take a look at where Walgreens Boots Alliance, Inc. (NASDAQ:WBA) stands against the other beaten down dividend stocks.
Dividend stocks have faced challenges over the past year due to the rising focus on tech stocks. However, the value of income remains strong, and investors haven’t overlooked dividend equities. As a result, US companies are now more focused on dividends, offering substantial payouts to shareholders. In fact, many tech companies have begun issuing dividends this year, thanks to strong cash flow on their balance sheets. While they could reinvest in growth, sharing profits with shareholders has become an appealing strategy to attract investors.
This means that with the changing market dynamics, high-quality companies with strong balance sheets that are trading at lower multiples have become more appealing. Dividend stocks often fall into this category, as they typically have stable business models and cash flows that allow them to consistently return earnings to investors. Dan Lefkovitz, a strategist for Morningstar Indexes, also highlighted this in the firm’s latest report:
“Investing in dividend-paying stocks is a good way to participate in equities over the long term. There have been long stretches when the dividend-paying section of the market has outperformed. Eventually, they’ll come back into favor. Dividend-paying stocks have a value bias. To the extent that there’s a rotation away from technology and growth into the value side of the market and more old economy sectors, that’s going to benefit the dividend-paying portion of the market.”
Another factor influencing the market trends is the Fed’s anticipated rate cuts. Investors believe the Fed is likely to start lowering interest rates in September, marking the beginning of a new easing cycle after one of its most aggressive tightening phases. The central bank began raising rates in March 2022 in response to soaring inflation, and they’ve remained at restrictive levels since July 2023. According to popular belief, dividend investors might benefit as rates decline. Lower rates can reduce bond yields, making dividend yields more appealing by comparison. In addition, companies with higher debt, such as utility companies and REITs, often benefit from falling rates and are typically among dividend payers.
If we set aside the impact of interest rates on dividend stocks, it becomes clear that they have made a substantial contribution regardless of market conditions. According to a study by S&P Dow Jones Indices, from 1926 to July 2023, dividends accounted for 32% of the broader market’s monthly total return, with the rest coming from capital appreciation. The report also underscored the power of compounding dividends. Without dividends, an initial investment in the stock market on January 1, 1930, would have grown to $214 by July 2023. However, with dividends reinvested, that same investment would have soared to $7,219 over the same period.
While there are encouraging signs for dividend stocks, they have struggled to keep pace with the broader market this year. The Dividend Aristocrats Index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, has gained nearly 9% in 2024, compared with over 16.5% return of the broader market. With this, we will take a look at some of the best beaten down dividend stocks to invest in.
Our Methodology:
To compile this list, we began by examining stocks that have experienced a decline from their peak prices within the past three years. From this pool, we selected 10 dividend-paying stocks that have witnessed a drop of 25% or greater in their share prices over these three years. The rankings within the list are based on the extent of the decrease in share prices from their three-year highs to their current levels, with the list arranged in ascending order of these declines as of August 30, 2024.
We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A pharmacist discussing the health benefits of a prescription medication with a customer.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA)
3-year high-to-low share price decrease as of August 30: 82.9%
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) is an Illinois-based retail company that owns pharmaceutical manufacturing and distribution companies. The stock is down by over 66% this year so far because the retail pharmacy chain has been underperforming due to competition from online retailers and pressure from pharmacy benefits managers (PBMs). Additionally, the company cut its dividend by 50% at the beginning of the year, following nearly 50 years of consistent increases. This has led to a loss of investor confidence in the company’s credibility. However, management remains optimistic about their ability to reverse the situation.
The optimism largely stems from Walgreens Boots Alliance, Inc. (NASDAQ:WBA)’s cost-cutting strategies. The new CEO has suggested closing several underperforming stores and reducing primary-care initiatives. Moreover, the company plans to launch a US Retail Pharmacy action plan to improve customer and patient experiences. It will also streamline its US Healthcare portfolio and better integrate its pharmacy and healthcare operations to boost market competitiveness.
Ariel Investments also highlighted this in its Q2 2024 investor letter:
“Alternatively, shares of retail drugstore operator, Walgreens Boots Alliance, Inc. (NASDAQ:WBA), underperformed following an earnings miss and significant reduction to full year guidance, largely due to continued weakness in its U.S. retail business. In response, management announced a multi-year plan for the U.S. business to reduce the retail footprint, invest in the customer experience, align the retail and healthcare businesses for enhanced go-to-market capabilities and simplify the healthcare portfolio. Meanwhile, the company continues to execute on its cost savings initiatives to optimize profitability and is using excess capital to prioritize the sustainability of its operations and balance sheet. Over the medium-term, we expect a re-rating in shares as WBA’s new CEO rebuilds the leadership team and earns credibility by executing on previously articulated strategic imperatives as well as margin.”
Though Walgreens Boots Alliance, Inc. (NASDAQ:WBA) has significantly reduced its dividend, the company’s cash flow remains stable, which suggests that the outlook for future dividends isn’t entirely bleak. In the most recent quarter, the company generated $605 million in operating cash flow and its free cash flow came in at $334 million. In the first nine months of the year, the company paid over $1 billion to shareholders in dividends. The company currently offers a quarterly dividend of $0.25 per share and has a dividend yield of 11.10%, as of August 30.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) was included in 35 hedge fund portfolios at the end of Q2 2024, down from 41 in the previous quarter, as per Insider Monkey’s database. The stakes held by these hedge funds have a total value of nearly $427 million.
Overall WBA ranks 1st on our list of the best beaten down dividend stocks to invest in now. While we acknowledge the potential for WBA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WBA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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