Why Is Walgreens Boots Alliance, Inc. (WBA) the Best High Yield Dividend Stock With Upside Potential?


We recently compiled a list of the 10 Very High Yield Dividend Stocks With Upside Potential. In this article, we are going to take a look at where Walgreens Boots Alliance, Inc. (NASDAQ:WBA) stands against the other stocks with over 8% dividend yield.

High yields have always sparked debate between analysts and investors. Analysts typically advise caution with extremely high yields, while investors often find them attractive. Analysts’ concerns are valid; high yields can sometimes be warning signs of financial instability within a company. Many companies offering exceptionally high yields have been on the brink of cutting or suspending their dividends. That said, no company is completely out of the woods regarding its challenges, and dividend yield plays a minor role in a company’s financial difficulties. In fact, many reports have highlighted that high-yield stocks have performed well over the years.

Newton Investment Management published a report revealing that high-yield dividend stocks outperformed the broader market during high inflationary periods from 1940 to 2021. The report also showed that investment portfolios with high-yield dividend stocks outperformed those with low or no dividend stocks in terms of value-weighted performance. High-yield portfolios outpaced low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points. This outcome is informative, yet it does not provide insights into the market conditions of that time, offering only a general overview of high-yield stock performance. Analysts have been particularly attentive to how dividend stocks perform during periods of market volatility, recognizing that the demand for regular income is most keenly felt during these times. Therefore, analysts recommend considering stocks with high yields only if these companies also demonstrate strong dividend growth streaks.

The S&P High Yield Dividend Aristocrat Index seeks to track the performance of companies with at least 20 consecutive years of dividend growth with an average dividend yield of 3%. According to a report by S&P Dow Jones Indices, in a backdrop of slowing growth but rising inflation, the index achieved a monthly average total return of 0.39% from 1999 through April 2024, surpassing the benchmark by approximately 120 basis points. Historically, inflationary environments have typically benefited short-duration stocks like Dividend Aristocrat companies. During slow growth phases with declining inflation, the performance of the High Yield Dividend Aristocrats has aligned closely with the benchmark. The report further mentioned that the dividend growth rate for the index also surpassed inflation over the long term.

As mentioned above, when investing in dividend stocks, high yield and dividend growth must go hand in hand, as many companies have shown that it is indeed possible. Analysts typically view yields between 3% to 7% as healthy. The health of dividend stocks is often assessed based on their ability to generate cash flow and their track record of dividend growth. Investors favor stocks that not only offer high yields but also maintain or steadily increase their dividend payouts, rather than frequently cutting them. Examples include some of the best dividend stocks such as Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. that have above-average dividend yields coupled with robust dividend growth histories. To read more about strong dividend payers, have a look at Best Blue Chip Dividend Stocks To Buy.

Our Methodology:

For this list, we screened for dividend stocks with yields higher than 8% as of July 8. Then, we narrowed down the choices by finding stocks with an upside potential according to analyst predictions. Finally, we selected companies with the most hedge fund investors holding stakes in them, using Insider Monkey’s Q1 2024 database. The stocks are ranked in ascending order of hedge fund investors having stakes in them. 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).

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A pharmacist discussing the health benefits of a prescription medication with a customer.

Walgreens Boots Alliance, Inc. (NASDAQ:WBA)

Number of Hedge Fund Holders: 41

Dividend Yield as of July 8: 9.20%

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) tops our list of the best dividend stocks with over 8% yield. The company owns and operates retail pharmacy chains and other pharmaceutical manufacturing and distribution companies. In a disappointing start to 2024, the company cut its dividend after maintaining a streak of 47 consecutive years of growth. The decision aimed to retain more cash to support growth initiatives and bolster its balance sheet.

Walgreens Boots Alliance, Inc. (NASDAQ:WBA)’s new CEO, Tim Wentworth, is on a mission to turn things around for the company. In a recent development, he announced plans to close a significant number of underperforming stores and scale back the company’s primary-care business ventures. Along with these closures, the company intends to implement a US Retail Pharmacy action plan aimed at enhancing customer and patient experiences across various channels. Additionally, the company will streamline and focus its U.S. Healthcare portfolio and align its U.S. pharmacy and Healthcare organizations to improve market capabilities.

The big question is whether these strategies are benefiting Walgreens Boots Alliance, Inc. (NASDAQ:WBA). The fiscal Q3 2024 earnings revealed that the company is facing a challenging operating environment. Ongoing pressures on US consumers and recent market dynamics have negatively affected pharmacy margins. That said, the company generated revenues of $35.4 billion, up 2.6% from the same period last year and ahead of expectations. Cash position was also strong, with $605 million in operating cash flow and $334 million in free cash flow, showing an increase of $778 million from a prior-year period. Despite these bright spots, the negatives outweigh the positives for Walgreens Boots Alliance, Inc. (NASDAQ:WBA). The company has lowered its guidance for the second time this year, concerning investors.

That said, there are some rays of hope with the new CEO and the measures being implemented, even if they take time. Additionally, the company’s cash flow suggests a promising future for dividends, which will also be bolstered by cost-cutting efforts. Walgreens Boots Alliance, Inc. (NASDAQ:WBA) currently offers a quarterly dividend of $0.25 per share and has an impressive dividend yield of 9.20%, as of July 8.

The number of hedge funds tracked by Insider Monkey owning stakes in Walgreens Boots Alliance, Inc. (NASDAQ:WBA) jumped to 41 in Q1 2024, from 31 in the previous quarter. These stakes have a total value of over $715 million. Among these hedge funds, Sessa Capital was the company’s leading stakeholder in Q1.

Overall WBA ranks 1st on our list of the best high yield dividend stocks with upside potential. You can visit 10 Very High Yield Dividend Stocks With Upside Potential to see the other high yield dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of WBA as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than WBA but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

 

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.

 

Disclosure: None. This article is originally published at Insider Monkey.



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