WBA is in stage #4. The company reported bad earnings and a gloomy outlook last week. It sold off by 10% immediately. The company announced a closure of 450 locations and earnings was a miss. But not by much. Only by 6.3%. I have seen companies missing by far more. And investors are asking a question. Is WBA a buy? Or is the company going to blow? Both charts indicate a gloomy look. The stock was selling off since 2015 and even the 2021 mania didn’t help.

 

 

There are a few aspects why WBA could be appealing to investors. One of the significant ones is that WBA is not just a small all-things retailer but a pharmacy. Lately, the management has focused on expanding into a primary care which should be a guarantor of future growth. You would think that being in the health care and pharmacy business should be no brainer. As the population is aging and becoming sicker, pharmacies and healthcare should be booming. But we see the exact opposite across the board. Unfortunately, historical data scream to stay away. But should we?

WBA revenue kept growing for years. But that revenue doesn’t translate to profitability. We saw a little dip in 2020 related to covid:

 

 

But the company’s expenses were fairly regular until the years between 2015 and 2020 when we saw a sudden spike in the administrative expenses. This clearly corresponds to the share price beginning of decline:

 

 

Another correlation is the decline in cash flow. It also started around 2015-2016:

 

 

The same can be said about earnings. Again, we can see a steady decline since 2017:

 

 

WBA is better with the debt. They borrowed heavily during 2014 and 2019 but were able to retire the entire debt by the end of 2019. Now the company is leveraged again.

 

 

The company is a dividend payer, and it increased the dividends aggressively during 2004 and 2019. From 2019 we can see a slowdown in dividend growth. That bears a question, is the dividend safe?
A 1-year dividend growth slowed down to 0.42%. 5-year average is 3.71%:

 

 

The company has a very good history of not diluting shareholders’ stake. In fact, during 2017 and 2020 they retired some shares outstanding.

 

 

Looking at the dividend safety, we can see the free cash flow dropping significantly. Despite the projection of free cash flow growth in 2024 and 2025, this year is low enough to question the safety of the dividend. I think the company will have enough cash to cover the dividend, but if the projections do not materialize and WBA continues to bleed, the dividend cut may be imminent.

 

 

WBA is cheap as far as fair value (at $60.15) but it is my view that WBA is cheap for a reason. Unless the financials improve, WBA is not a good investment. CVS could be a better choice.

 

 

Looking at the performance of the stock compared to SPY, we see that there is literally no reason to hold this stock. The WBA dividend payout is lesser than SPY and the stock growth also underperforms (grossly) the index. It is better to invest in SPY than WBA:

 

 

Here is another look at the performance of the stock investment compared to the index. The chart shows the value of $10,000 invested in WBA compared to SPY with and without dividend reinvestment. Both results are tragic, at best:

 

 

The stock is now AGGRESSIVE SELL
 

This post was published in our newsletter to our subscribers on Sunday, June 30th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.