Walgreens stock yields 9.3%: is it a bargain or a value trap?

Walgreens Boots Alliance (WBA) stock price has underperformed the market this year as concerns about the pharmacy industry continues. It has dropped by over 57% this year while the Nasdaq 100 and S&P 500 indices have risen by double-digits.

Walgreens is not the only troubled pharmacy chain. CVS Health, the biggest player in the industry, has tumbled by over 26% this year. Rite Aid, a company that was the third biggest in the industry, has already filed for bankruptcy.

The pharmacy industry is changing

Walgreens and CVS Health are going through a rough patch amid rising consumer behavior and rising competition from old companies like Walmart, and Target, and newer brands like Amazon and Mark Cuban’s CostPlus. 

The companies are also facing the challenge of retail theft, which they are not dealing with it well. In some places, Walgreens locks some products, forcing a customer to call a worker, which is an inconvenience and the biggest advert to Amazon.

Walgreens Boots Alliance, a former Dow Jones constituent, is facing these challenges, which is affecting its profits and growth. As a remedy, the company is considering spinning off or selling its Boots brand. 

It is also closing thousands of stores and spending billions of dollars to improve its store layouts. Earlier this year, the company also took out a $6 billion hit as it downsized its VillageMD investment. It also shuttered 160 clinics.

The company has also faced more headwinds. For example, it agreed to a $5.5 billion payment related to opioids.

WBA earnings

The most recent financial results showed that Walgreens Boots Alliance’s business had a mixed performance in the first quarter. 

Its revenues rose from over $35.4 billion in Q1 of 2023 to over $36.3 billion. Its nine-month sales rose from over $103 billion to $110 billion.

Walgreens also had a good bottom line as the net earnings rose to over $344 million in the first quarter. However, for the nine months, its net loss jumped to over $12.3 billion because of the VillageMD write-down. 

The WBA stock price dropped sharply because the management decided to lower its forward guidance. It now expects that the EPS guidance for this year will be between $2.80 and $2.95 in what the management attributed to the thinning pharmacy margins. 

Undervalued with a catch

The recent Walgreens stock crash has left behind a company that is severely undervalued on a historical perspective. Data shows that the company’s valuation has slumped to over $9.6 billion.

Walgreens now trades at just 0.06 trailing twelve months (TTM)  and forward sales, which is significantly cheap. In contrast, CVS Health trades at 0.20 forward and TTM sales. 

A Discounted Cash Flow (DCF) calculation by Simply Wall Street shows that the company is highly undervalued. Its stock trades at a 75.8% discount to its fair value. 

WBA has also gotten a high dividend yield, a move that might make it attractive among income-focused investors. It has a dividend yield of 9.3% and has paid it for 47 consecutive years, meaning that it will be a dividend king. It also has a low payout ratio of 46.20%.

However, while Walgreens is cheap and has an attractive yield, the main risk is that its turnaround will take a long time to complete. In the past companies that executed their turnaround well like General Electric and IBM took years to do so.

The case will be worse for Walgreens, a company that has admitted that its business was operating in a difficult environment. This trend will continue for a while, especially in basic items. With customers being highly selective, most of them will continue buying from Amazon and Walmart, where they have Prime and Walmart+ subscriptions. 

At the same time, Walgreens has some substantial debt coming up. It has over $8.8 billion in long-term debt, with $1 billion coming up in January 2026 and another $1 billion in late 2026. 

Walgreens stock price analysis

It is often said that investors should buy when there is blood on the streets. In this case, Walgreens seems like a good company but it has substantial risks ahead. 

On the weekly chart, the stock has formed a descending channel shown in green and is at its lower side. The shares have remained below the 50-day and 100-day moving averages, meaning that bears are in control. 

At the same time, the Relative Strength Index (RSI) and the MACD have all pointed downwards. The stock has also formed a bearish flag chart pattern. 

Therefore, there is a risk that it will continue falling in the coming weeks as sellers target moves below $10. The alternative scenario is where it bounces back as buyers target the upper side of the channel at $19.

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