January 17, 2024 • 34 mins
In this episode, I show you how to handle and avoid dividend cuts, using the most recent example of an ex-dividend aristocrat Walgreens.
I cover the following topics in this episode:
- What are dividends?
- Who is Walgreens (WBA)?
- Walgreens dividend history
- Walgreens dividend cut
- Why cut the dividend?
- What to do now?
- My story of GE and TC Energy
- Early warning signs of a dividend cut
- What are dividend aristocrats?
- The importance of diversification
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Transcript
Episode Transcript
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Speaker 1 (00:00):
In this episode we're going to look at what to do
when a company reduces itsdividend.
Specifically, we'll look at arecent example with Walgreens.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
Dividend podcast.
In this episode we're going tocover five topics.
(00:23):
We'll start with a little bitof information about Walgreens,
the company itself, then we'lllook at the company's dividend
history.
Then we're going to look at themost recent dividend cut that
the company made.
And then what do we do now?
So if you own the stock, shouldyou buy more shares, should you
(00:45):
sell the shares you already ownor should you skip it?
So we're going to talk allabout that in section number
four.
And then the last topic in thisepisode is the importance of
diversification.
Now, quick reminder, especiallyfor those of you that are new
to this channel I'm just goingto spend a minute very quickly
(01:05):
on dividends right before wejump into the rest of this
episode.
So dividends are essentiallythe profits that a company
shares with you, the shareholder.
So in this example on thescreen, if a company is paying a
dividend of $1 per share andyou own a thousand shares, you
will receive $1,000 every yearfor as long as you own those
(01:27):
shares and as long as thecompany continues to pay the
dividend, regardless of thestock price.
The stock prices go up and downall the time, but as long as
you hold on to those shares andthe company pays a dividend of
$1 per share in this example,you'll receive $1,000 for as
long as you own those shares andas long as the company
(01:49):
continues to pay the dividend.
Now the dividends are depositeddirectly into your trading
account as cash, so you canspend the money if you wish, or
you can reinvest it into otherstocks that pay dividends as
well.
So it's a way to compound yourdividend growth.
Now we have students who aretoday earning $500 a year in
(02:12):
dividends.
Some of them are making $5,000a year in dividends.
Some of them are making $20,000, $60,000, $70,000 a year in
dividend income.
So when a company announces adividend reduction, that is
something that we, as dividendinvestors, take very seriously
(02:32):
and that's what we're going totalk about in today's episode.
So let's start with our firsttopic the company itself
Walgreens.
So let's talk a little bitabout the company.
The official name is WalgreensBoots Alliance, but many of you
will recognize the logos on thescreen.
If you're in the US.
You're going to recognize theWalgreens logo.
(02:55):
This is a pharmacy and they ownmany, many locations in the US.
If you're in the UK, you'llrecognize the logo and they go
by the name of Boots.
The company itself was foundedin 1909 and is headquartered in
Deerfield, illinois.
In 2014, boots and Walgreensmerged to form the new company
(03:20):
that we have today.
The company has today 330,000employees and it operates as a
healthcare, pharmacy and retailcompany in the United States, in
the United Kingdom, germany andinternationally.
The company today has a marketcap of 19.7 billion dollars and
(03:46):
it is one of the largest retailpharmacy chains in the US, with
over 8,500 locations.
Almost 75 percentthree-quarters of Americans live
within five miles of aWalgreens location, so this is
certainly a very large company.
Overall, worldwide, the companyhas 13,000 locations.
(04:11):
So now let's move on, and we'regoing to look at the dividend
history of Walgreens.
So the company has paid adividend every year since 1933.
So that's 91 years ofconsistently paying dividends.
That's an impressive trackrecord.
And, even better, the companyhas had 47 years of consecutive
(04:37):
dividend increases every singleyear, year after year.
Walgreens was part of the listof dividend aristocrats, and I'm
going to talk about thearistocrats a little later in
this episode.
So this is an impressive trackrecord, and so this is a company
that you look at and you wouldhave a high degree of confidence
(04:59):
that they're going to continueto pay a dividend in the future
and hopefully increase it in thefuture.
Dividend increases are generallya positive sign.
When a company announces thatthey're going to increase the
dividend, it means that they'vedone their homework, they've
looked at their balance sheet,they've looked at their
(05:20):
financial statements how muchrevenue they expect to earn, not
just in the current year, butin future years and then they
look at how much is the dividendtoday and how much can we
continue to pay the dividend inthe future, because nobody wants
to cut their dividend oreliminate it, because whenever
they do that, the stock pricedrops immediately.
(05:41):
We saw that in March of 2020when COVID hit Boeing, general
Motors, disney eliminated thedividend altogether and
immediately their stock pricestanked.
So a positive sign is when acompany increases its dividend
or announces a dividend increase.
So and over time and we've seenthis over and over again, I've
(06:03):
been doing this for over 24years in the long term, every
time a company increases thedividend, that's more money in
your pocket.
But it also helps to increasethe stock price, because when
the dividend goes up, thedividend yield goes up and then
it attracts more investors tothe company and, just because of
supply and demand, if there'smore people interested in the
(06:24):
stock, then the stock price isgoing to come up.
So that's a positive sign whenthe dividend is increased.
But what we're talking abouttoday is a dividend decrease.
So that takes us to the nexttopic in this video,
specifically Walgreensannouncing a dividend cut.
(06:47):
Now on the screen here.
I'm just going to go back justa few years we're going to look
at.
You can see 2017, walgreens waspaying a dividend of $1.52.
The following year, theyincreased the dividend to $1.64,
then they increased it again.
You can see the dividend goingup consistently and, as I
mentioned a couple of minutesago, they've had 47 years of
(07:09):
consecutive dividend increases.
But then you'll notice lastyear, in 2023, the annual
dividend was $1.92, and now it'sprojected this year to be just
$1.
Now, as of this recording, atthe beginning of 2024, the year
isn't over yet, so the companycould announce another dividend
(07:31):
cut or they could increase thedividend.
So we really don't know justyet what the rest of the year is
going to look like forWalgreens.
So let's look at specificallythe quarterly dividend, because
that's what we can look at today.
So the previous quarterlydividend was $0.48 a share,
(07:53):
because the dividend just paidevery quarter in this case with
Walgreens and on January 4th2024, the company announced that
its new quarterly dividendwould only be $0.25.
So that is a reduction of 48%.
So if you own this stock, yourdividend income has now just
(08:19):
dropped by 48% and that's asignificant drop.
And naturally, as I mentionedbefore, look at what happened to
the stock price and you can seeon January 4th and you can see
it on the chart up on the screenon January 4th, the stock price
dropped by approximately $2 ashare.
(08:40):
Now, on the 5th and the 6th andthe 8th sorry the stock price
went up a little bit, but nowit's come back down again.
So, as of this recording, thestock price is down again.
So this is nothing new.
We see this all the time.
Every time a company announcesa dividend cut, the stock price
is going to drop.
(09:01):
Why?
Because the yield is dropping.
The dividend income that youwould be getting from this
company has dropped.
So investors some investorswill sell their shares, so the
stock price drops, but why didthe company cut its dividend?
(09:21):
So for that we're going to go tothe CEO of the company, tim
Wentworth, and I'm going to readto you his comments regarding
this recent dividendannouncement.
So Tim says since the start ofmy tenure with WBA, we have been
evaluating our options acrossour strategies and operations,
(09:44):
including those related to ourcapital allocation.
We have made the difficultdecision to reduce our quarterly
dividend payment to $0.25ashare to strengthen our
long-term balance sheet and cashposition.
This action reinforces our goalof increasing cash flow while
(10:05):
freeing up capital to invest insustainable growth initiatives
in our pharmacy and healthcarebusinesses, which we believe
will ultimately improveshareholder value.
Okay, so end quote.
So that was the quote from theCEO of Tim Wentworth.
Ceo of Walgreens.
Basically, what the CEO issaying here is that the company
(10:30):
decided to cut the dividend toimprove its cash flow.
So it looks like the company isin some type of financial
trouble where they don't haveenough cash to pay the
shareholders.
So they're going to keep thatcash for themselves, reinvest it
into the business to grow theirbusiness.
So ultimately, what he says inthe last sentence there is to
(10:54):
improve shareholder value at theend of the day.
So how are you going to do that?
You got to get the share priceto come back up again.
Hopefully, increasing thedividend again will also help to
bring the share price up again.
So the motivation seems fine.
The company is doing what itcan, it's cutting costs and it's
doing what it can to be in abetter financial situation in
(11:19):
the future.
So then, what do you do now Forthose of you who have shares in
Walgreens or are consideringbuying shares in Walgreens so
that's our next topic in thisepisode Do you buy, sell, hold
or skip this company altogether?
Now I'm not going to be able toget into specifics, specifics
(11:42):
regarding your personalsituation.
I can't do that.
I don't know who you are, howbig your investments are, how
long you've been investing inthe company, so we can't get
into specifics.
I will have a discussion inthis episode and provide you
some guidelines, some ideas, andhelp you to make your own
(12:05):
decision.
Now there's many factors toconsider here.
Number one is going to be yourown risk tolerance.
Do you hang on to the shares?
What if they continue to drop?
What if they cut the dividendagain?
Or what if now is a good timeto buy because the stock price
is low, the dividend yield isgood, maybe the stock has
(12:27):
nowhere to go but up from here.
So that's going to all dependon your own risk tolerance.
Are you able to sleep at nightwith the decisions, the
investing decisions, that you'vemade?
Number two factor to consider isare you a beginner, are you an
intermediate or experiencedinvestor?
Do you have a portfolio ofmaybe five stocks or do you have
(12:49):
a portfolio of 45 stocks?
So that's all going to depend.
And if you, you know, did youjust start investing recently or
have you been investing for thelast 25 years?
And if, as an experiencedinvestor, I've seen this before.
I've seen it with othercompanies where the dividend
gets cut.
But based on my experience, I'mnow able to make better
(13:11):
decisions going forward.
And then the other things toconsider are you know how many
other dividend stocks do you own?
Is this the only stock that youhave that pays dividends, or do
you have other ones?
So, even though the dividend hasgone down 48% for Walgreens, is
it negatively going to affectyour overall portfolio or not,
(13:32):
because the other companiesmight have increased their
dividend to offset, you know,the 48% decrease with Walgreens?
How long have you held theshares.
So anybody who's bought theshares 10, 15 years ago is still
making money, right, they wouldhave collected all the
dividends over the last 10, 15years and the share price was
(13:52):
much lower 10, 15 years ago thanit is today.
So they're still.
They're doing fine, they'restill making money.
But if you just bought it ayear ago, six months ago, it's
going to be a completelydifferent story.
And the other factor toconsider is how much you have
invested in WBA.
Is it $500 or is it $50,000 inthis company?
(14:15):
So that's also going to weighon your decision whether to buy
or sell.
And there are a couple ofunknowns here.
I've already mentioned thembefore, but let's go through
them again.
So there's five of them herethat I listed on the screen.
Will the dividend get reducedagain?
We don't know.
(14:36):
That's an unknown.
Will the dividend geteliminated completely altogether
this year?
We don't know that either.
Or will the dividend go up,right?
So that's an unknown.
How will the stock price react?
Is the price going to keepgoing down or is the price going
to start to come up now thatthe company says they're
positioning themselves to be ina better financial situation?
(14:58):
So we don't know if the priceis going to go up or down.
Will the company turn around,be successful?
Because that's what theexecutive team at Walgreens is
hoping and that's what they'reworking towards is to turn this
around and make it a financiallyhealthy company.
But will it take six months?
Will it take a year?
(15:19):
Will it take two years?
We don't know.
So there's a whole bunch ofunknowns here.
So you're watching this episode,you're listening to this
episode, because we said we weregoing to talk about so what do
you do now?
That's the question.
So I'm going to keep it general.
Again, it's not going to bespecific to your needs.
I'm going to keep it general.
(15:41):
So here are some suggestions.
So if you don't own the companyright now, I would skip it for
now, just because when we invest, we want to minimize our risk
as much as possible.
So here's a company that hasjust cut their dividend.
Their earnings are negative andwe don't know what's going to
(16:01):
happen in the next six months toa year.
Is the price going to go down?
Are they going to cut thedividend again?
We just don't know.
Versus a company that has notcut its dividend, some other
company that has increased itsdividend?
That's probably a safer choicethan what's happening with
Walgreens today.
(16:21):
So we want to make the saferchoice out of the two.
So if you don't own it, skip itfor now.
That's probably a good generalguideline for most people.
Now the current stock pricetoday, as of this recording, is
$22.90.
The current dividend yield is4.4%.
So if you bought the shares forless than $22.90, so maybe you
(16:47):
were lucky and you bought somewhen the stock price was at $20
or at $21.
So if you bought it for lessthan what it's trading at today,
you may consider sellingbecause you're not going to lose
any money.
You're probably just going tobreak even, maybe even a little
bit of a profit if you bought itat $20 and it's trading at $22.
Sorry, and if it's trading at$22 today, you're not going to
(17:13):
lose any money on that.
So that would be a quickdecision.
You're not going to loseanything.
You may consider selling Againto avoid any future dividend
cuts.
That may or may not happen, wedon't know.
Again, it's all aboutminimizing your risk.
(17:34):
Now I've gotten some questions.
I've gotten some emails frompeople who bought the stock when
it was very high.
They bought it at $40 a shareor even $50 a share back in 2022
.
So for those folks, they wantto know what they should be
doing now.
So what do you do so in thissituation?
(17:54):
You know, personally I hate tolose money.
I just hate it.
So if you're in that ballparkand you feel the same way, you
may consider just holding it Now.
Hopefully, this is more forexperienced investors, investors
(18:15):
who have been doing this formany, many years.
You already have a good sizeportfolio.
You're already generatingdividend income from other
dividends and those dividendshave gone up.
You may consider holdingbecause if the company can turn
this business around, then thestock price will eventually come
(18:36):
back up and the dividend,hopefully, will go up again.
And I'm going to show you anexample right after this.
So hang in there.
Let's look at the other exampleI'm going to show you right
after this.
But so if you bought it at ahigh price, you may consider
holding.
The other option is you may wantto sell, but if you do, you are
going to solidify those losses.
That's entirely up to you.
(18:58):
You might be thinking, well, Ican sell it, take those losses
Now.
I can put that into somethingelse that's going to provide me
with a better yield and we havehigher confidence that their
dividend will go up over time.
So you may want to do that.
So it's a bit of a judgment call.
(19:18):
I already identified thefactors that might affect your
decision and I've identified theunknowns that are out there.
So I'm sorry, I can't be morespecific.
And you also want to consideryou know your if you bought it
at $50, two years ago or fiveyears ago at a high price and
(19:41):
now it's at 22,.
You also want to consider thedividends you would have
accumulated over those years,let's say over the last five
years.
So how much did you get individends?
So just don't look at the stockprice that you bought it at and
the stock price today.
Consider the dividends thatyou've had over the last four or
five years and then take a lookat what your losses would
(20:05):
actually be if you were to sellthe stock today.
So that's why it's going to bevery the decision is going to be
very specific to you and youalone.
Okay, so I want to share withyou two personal stories of mine
that may help sway yourdecision, or maybe not, because
both of these stories arecomplete opposites of each other
(20:27):
.
So General Electric is one.
So I still own those sharestoday.
I've had them for many, many,many years and over the last
couple of years the company hashad a number of dividend cuts.
I've kind of lost track.
I think there was three cuts,maybe four, but I know three for
(20:47):
sure dividend cuts.
So the company cut the dividendthe first time and I held on to
it and I said, you know, Ithink it'll, they can turn this
around, the dividend will comeback.
This is a large corporation,it's not going anywhere, it'll
be fine.
And then they made anotherdividend cut and then the stock
price dropped even more and thenit got into a position where,
(21:11):
like I said before, personally Ihate to lose money.
So I said, okay, well, I'lljust hang on to it.
But then, after the third cut,the price dropped even more and
now I'm not interested inselling it now and again, it's
not a huge investment.
I forget the exact number,maybe it was $2,000 total in
General Electric.
(21:31):
So at this point it's it's gonedown too far that I'm just
going to hang on to it.
It doesn't negatively affect myportfolio.
I have a lot of other dividendstocks that grow their dividend
every year.
So General Electric did nothave a happy ending Now it could
(21:51):
.
Maybe in the next five, six, 10years maybe it'll come back up
again, but as of today it's it's.
It has not been a goodperforming stock for me.
On the other hand, tc Energy iscompletely the opposite, and TC
Energy also cut their dividendin 2000.
(22:12):
And then you can see it up onthe screen here right.
So now I'm not going really toofar back.
So on the screen you can see in1994, the company was paying an
annual dividend of $0.94 ashare.
The year after that theyincreased the dividend to $1.02.
And then after that, the yearafter that, the dividend went up
(22:33):
again.
But in 1998, and maybe thatwould have been a yellow flag in
1998, the dividend stayed thesame.
So the company didn't increaseit, they just kept it the same.
But in 1999, they reduced thedividend, so it went from $1.18
a share to $1.12 a share.
And then in 2000, they reducedthe dividend again.
(22:56):
So there was two dividend cuts.
And so in 2000, the dividendwas 80 cents a share.
So that scared away a lot ofinvestors.
The stock price came down quitea bit and I happened to buy
shares in TC Energy in 2000,after the second dividend cut
(23:16):
was made and again it wasn't ahuge investment.
It was $2,479 total.
But you can see here thecompany has increased its
dividend every single year since2000.
So we're looking at 24 years ofconsecutive dividend increases
(23:36):
after those last two cuts thatthey made.
So here the company was able toturn itself around financially
and then they started increasingthe dividend.
So in 2000, the dividend was 80cents a share.
The annual dividend and as ofthis recording it is $3.72 a
share and, if you recall, Iinvested $2,479 in this company.
(24:02):
This company has now providedme with over $8,700 in dividends
and you can see that up on thescreen here.
So this was a success story.
So there you have it.
I've given you kind of bothsides of the coin general
electric and TC energy.
So where is Walgreens going tofall into this?
(24:24):
Is it going to be like GE or isit going to be like TC energy?
So nobody knows.
But let's just get back to ourspecific example that we're
discussing in today's episodewith Walgreens.
So some of you want to knowwere there any early warning
signs?
(24:44):
Was there something that couldhave told us that maybe a
dividend cut was coming?
So maybe we can learn from thisexperience and we can apply it
to the stocks that we own today.
And so the answer is yes.
There was some early warningsigns and we can see here up on
the screen.
There was three major signs hereWalgreens EPS, which is the
(25:10):
earnings per share, was actuallynegative in three out of the
last five quarters.
So that should be a yellow flagwhen the company is losing
money.
Sometimes it's fine to see theearnings drop, like one time in
a year, and then it goes back upagain, because we're always
looking at the last 20 years.
(25:31):
We want to see the earningsgrowing over a long period of
time, so one or two dips in theearnings is fine.
But in this case, if you lookat the last five quarters, you
can see that the earnings werenegative at three out of the
last five quarters.
So that's pretty bad.
The earnings were down, andwhat happened is, when the
earnings come down, the payoutratio goes over 100%, and for
(25:55):
those of you that are interested, I have an entire episode
talking about payout ratio.
That's an episode two, so youcan go ahead and watch that to
learn more about the payoutratio itself.
So the payout ratio being over100% was another yellow flag
like something is going on here.
The company is not makingenough money to pay the
(26:16):
shareholders, so something hasto happen to the dividend.
And then, finally, the lastthing was, if you look at the
previous year, 2023, there wasno increase in the quarterly
dividend.
So here was a company that hada dividend streak of 47 years of
(26:37):
consecutive dividend increases,but in 2023, they did not
increase the dividend at all,the quarterly dividend.
So if you look at the last fourquarters, the dividend remained
at 48 cents a share.
So that would have been anotheryellow flag.
So these are the three thingsto look for, even in stocks that
you own today, because it'llgive you some guidance and some
(27:02):
early warning signs that maybe adividend reduction is coming.
Now, there is one silver liningin all of this, okay, and that
has to do with the dividendaristocrats.
So, for those of you notfamiliar with the dividend
aristocrats, it's a list ofcompanies and there's only two
(27:22):
things that you need to meet therequirements to get into this
list.
So, number one you need to bepart of the SNMP 500 index.
So they're US companies.
If you're part of the SNMP 500index, that gets you one step of
the way there.
The other thing is you musthave at least 25 years of
consecutive dividend increases.
(27:44):
So if you meet those tworequirements, you are then
considered a dividend aristocratIn 2023, there were 68
companies in that list.
Now the good news is, 64 out ofthe 68 companies increased their
dividends.
Three companies kept thedividend unchanged and one of
(28:08):
them cut the dividend, and thatwas Walgreens.
So that's not bad.
The majority of companies thatare in the dividend aristocrat
list increased their dividends.
In fact, it was 64 out of the68 companies in the list grew
their dividend, but all of themedia attention always falls on
(28:29):
the one or few companies thatcut their dividend altogether.
So this brings us to the lasttopic in this episode, and it's
the importance ofdiversification.
So the key here is not to putall your eggs in one basket, so
diversification is the key.
(28:50):
Over time, you want to be ableto build your portfolio
consisting of companies in allof these 11 sectors you see up
on the screen here Access,energy materials, industrials,
consumer discretionary, consumerstaples, health care,
(29:10):
financials, informationtechnology, communication
services, utilities and realestate.
Now, this is not going tohappen overnight.
You can't do this right away.
It takes a few years to build awell diversified portfolio.
So you want to diversify acrossdifferent sectors so that, in
(29:30):
case one sector is down and it'sdragging all of the stocks down
, it doesn't negatively affectyour portfolio.
And you also want to make surethat you're investing in other
dividend stocks so that if youdo have a company which in this
case we've seen it's rare, butyou do have a company that cuts
(29:51):
its dividend again, it's notgoing to negatively affect your
overall dividend income that'sbeing generated by the portfolio
.
I've been doing this for over 24years and I can tell you that
my dividend income has gone upevery single year, and that's
including 2008, 2009.
We had the financial crisis,including COVID, in March of
(30:14):
2020.
The dividend income has gone upevery single year, so
diversification is going to helpyou to lower your risk.
So does this mean that youshould go out today and just buy
one dividend stock out of eachof these 11 sectors?
And the answer is no.
You want to make sure thatyou're buying not just any
(30:37):
dividend stock, but that it's ahigh quality dividend stock and
not just at any price.
You want to make sure that it'spriced low.
So how do you know, when you'relooking at a company, if it's a
high quality company, and howdo you know that it's priced low
?
So for that I've created what Icall the 12 rules of simply
investing.
This becomes your checklist.
(30:59):
If a company fails even onerule, skip it, move on to
something else.
And this list, this 12 rules,are going to help you to lower
your risk and help you makebetter investing decisions.
So let's take a look at them.
They're up on the screen here.
Rule number one is do youunderstand how the company is
(31:20):
making money?
If not, skip it, move on tosomething else.
20 years from now, will peoplestill need its product and
services?
That's rule number two.
Rule number three does thecompany have a low cost
competitive advantage?
Rule number four is itrecession proof?
Rule number five is itprofitable?
And we talked about earnings inthis episode.
Negative earnings is not good.
(31:42):
Number six does the companygrow its dividend?
And so we talked about dividendcuts in this episode as well.
Rule number seven can thecompany afford to pay the
dividend?
And rule number eight is thedebt less than 70%?
And rule number nine avoid anycompany with a recent dividend
cut.
So there you go.
That answers the question ofwhat to do with Walgreens today,
(32:04):
especially if you're juststarting to build your dividend
portfolio.
Rule number 10, does thecompany buy back its own shares?
Rule number 11 is the stockpriced low.
So we look at the P-E ratio, welook at the P-B ratio and then
we also look at the currentdividend yield and compare it to
the company's 20-year averagedividend yield.
(32:25):
And then rule number 12, keepyour emotions out of investing.
So, for those of you that areinterested, I've created the
Simply Investing course.
It's a self-paced online course, it's in 12 modules and it's
going to help you become abetter and successful investor.
(32:46):
In module one, we start withthe investing basics.
Module two, we cover the 12rules of Simply Investing in
detail, with real life examples.
In module three, you learn howto apply the 12 rules yourself.
Module four we look at theSimply Investing platform.
In module five, you learn howto place your first stock order
(33:06):
if you've never done it before.
Module six building and trackingyour portfolio.
Module seven when to sell.
Module eight reducing your feesand risk, hopefully when it
comes to mutual funds, indexfunds and ETFs.
Module nine your action plan togetting started immediately.
And in module 10, I answer yourmost frequently asked questions
(33:28):
.
So we also have the SimplyInvesting platform, which is an
online web app.
It applies the rules to over6,000 companies in the US and in
Canada every single day, so youcan immediately see which
companies to avoid, the onesthat are overvalued or priced
high, and which ones to consider.
(33:50):
So if you're interested, youmay want to write down the
coupon code SAVE10SAVE10.
Save10 is going to save you 10%off of our course and the
platform as well.
If you enjoyed today's episode,be sure to hit the subscribe
button.
Hit the like button as well.
We have new episodes out everyweek and for more information,
(34:14):
take a look at our website,simplyinvestingcom.
Thanks for watching.
In this episode we're going to look at what to do
when a company reduces itsdividend.
Specifically, we'll look at arecent example with Walgreens.
Hi, my name is Kanwal Sarai andwelcome to the Simply Investing
Dividend podcast.
In this episode we're going tocover five topics.
(00:23):
We'll start with a little bitof information about Walgreens,
the company itself, then we'lllook at the company's dividend
history.
Then we're going to look at themost recent dividend cut that
the company made.
And then what do we do now?
So if you own the stock, shouldyou buy more shares, should you
(00:45):
sell the shares you already ownor should you skip it?
So we're going to talk allabout that in section number
four.
And then the last topic in thisepisode is the importance of
diversification.
Now, quick reminder, especiallyfor those of you that are new
to this channel I'm just goingto spend a minute very quickly
(01:05):
on dividends right before wejump into the rest of this
episode.
So dividends are essentiallythe profits that a company
shares with you, the shareholder.
So in this example on thescreen, if a company is paying a
dividend of $1 per share andyou own a thousand shares, you
will receive $1,000 every yearfor as long as you own those
(01:27):
shares and as long as thecompany continues to pay the
dividend, regardless of thestock price.
The stock prices go up and downall the time, but as long as
you hold on to those shares andthe company pays a dividend of
$1 per share in this example,you'll receive $1,000 for as
long as you own those shares andas long as the company
(01:49):
continues to pay the dividend.
Now the dividends are depositeddirectly into your trading
account as cash, so you canspend the money if you wish, or
you can reinvest it into otherstocks that pay dividends as
well.
So it's a way to compound yourdividend growth.
Now we have students who aretoday earning $500 a year in
(02:12):
dividends.
Some of them are making $5,000a year in dividends.
Some of them are making $20,000, $60,000, $70,000 a year in
dividend income.
So when a company announces adividend reduction, that is
something that we, as dividendinvestors, take very seriously
(02:32):
and that's what we're going totalk about in today's episode.
So let's start with our firsttopic the company itself
Walgreens.
So let's talk a little bitabout the company.
The official name is WalgreensBoots Alliance, but many of you
will recognize the logos on thescreen.
If you're in the US.
You're going to recognize theWalgreens logo.
(02:55):
This is a pharmacy and they ownmany, many locations in the US.
If you're in the UK, you'llrecognize the logo and they go
by the name of Boots.
The company itself was foundedin 1909 and is headquartered in
Deerfield, illinois.
In 2014, boots and Walgreensmerged to form the new company
(03:20):
that we have today.
The company has today 330,000employees and it operates as a
healthcare, pharmacy and retailcompany in the United States, in
the United Kingdom, germany andinternationally.
The company today has a marketcap of 19.7 billion dollars and
(03:46):
it is one of the largest retailpharmacy chains in the US, with
over 8,500 locations.
Almost 75 percentthree-quarters of Americans live
within five miles of aWalgreens location, so this is
certainly a very large company.
Overall, worldwide, the companyhas 13,000 locations.
(04:11):
So now let's move on, and we'regoing to look at the dividend
history of Walgreens.
So the company has paid adividend every year since 1933.
So that's 91 years ofconsistently paying dividends.
That's an impressive trackrecord.
And, even better, the companyhas had 47 years of consecutive
(04:37):
dividend increases every singleyear, year after year.
Walgreens was part of the listof dividend aristocrats, and I'm
going to talk about thearistocrats a little later in
this episode.
So this is an impressive trackrecord, and so this is a company
that you look at and you wouldhave a high degree of confidence
(04:59):
that they're going to continueto pay a dividend in the future
and hopefully increase it in thefuture.
Dividend increases are generallya positive sign.
When a company announces thatthey're going to increase the
dividend, it means that they'vedone their homework, they've
looked at their balance sheet,they've looked at their
(05:20):
financial statements how muchrevenue they expect to earn, not
just in the current year, butin future years and then they
look at how much is the dividendtoday and how much can we
continue to pay the dividend inthe future, because nobody wants
to cut their dividend oreliminate it, because whenever
they do that, the stock pricedrops immediately.
(05:41):
We saw that in March of 2020when COVID hit Boeing, general
Motors, disney eliminated thedividend altogether and
immediately their stock pricestanked.
So a positive sign is when acompany increases its dividend
or announces a dividend increase.
So and over time and we've seenthis over and over again, I've
(06:03):
been doing this for over 24years in the long term, every
time a company increases thedividend, that's more money in
your pocket.
But it also helps to increasethe stock price, because when
the dividend goes up, thedividend yield goes up and then
it attracts more investors tothe company and, just because of
supply and demand, if there'smore people interested in the
(06:24):
stock, then the stock price isgoing to come up.
So that's a positive sign whenthe dividend is increased.
But what we're talking abouttoday is a dividend decrease.
So that takes us to the nexttopic in this video,
specifically Walgreensannouncing a dividend cut.
(06:47):
Now on the screen here.
I'm just going to go back justa few years we're going to look
at.
You can see 2017, walgreens waspaying a dividend of $1.52.
The following year, theyincreased the dividend to $1.64,
then they increased it again.
You can see the dividend goingup consistently and, as I
mentioned a couple of minutesago, they've had 47 years of
(07:09):
consecutive dividend increases.
But then you'll notice lastyear, in 2023, the annual
dividend was $1.92, and now it'sprojected this year to be just
$1.
Now, as of this recording, atthe beginning of 2024, the year
isn't over yet, so the companycould announce another dividend
(07:31):
cut or they could increase thedividend.
So we really don't know justyet what the rest of the year is
going to look like forWalgreens.
So let's look at specificallythe quarterly dividend, because
that's what we can look at today.
So the previous quarterlydividend was $0.48 a share,
(07:53):
because the dividend just paidevery quarter in this case with
Walgreens and on January 4th2024, the company announced that
its new quarterly dividendwould only be $0.25.
So that is a reduction of 48%.
So if you own this stock, yourdividend income has now just
(08:19):
dropped by 48% and that's asignificant drop.
And naturally, as I mentionedbefore, look at what happened to
the stock price and you can seeon January 4th and you can see
it on the chart up on the screenon January 4th, the stock price
dropped by approximately $2 ashare.
(08:40):
Now, on the 5th and the 6th andthe 8th sorry the stock price
went up a little bit, but nowit's come back down again.
So, as of this recording, thestock price is down again.
So this is nothing new.
We see this all the time.
Every time a company announcesa dividend cut, the stock price
is going to drop.
(09:01):
Why?
Because the yield is dropping.
The dividend income that youwould be getting from this
company has dropped.
So investors some investorswill sell their shares, so the
stock price drops, but why didthe company cut its dividend?
(09:21):
So for that we're going to go tothe CEO of the company, tim
Wentworth, and I'm going to readto you his comments regarding
this recent dividendannouncement.
So Tim says since the start ofmy tenure with WBA, we have been
evaluating our options acrossour strategies and operations,
(09:44):
including those related to ourcapital allocation.
We have made the difficultdecision to reduce our quarterly
dividend payment to $0.25ashare to strengthen our
long-term balance sheet and cashposition.
This action reinforces our goalof increasing cash flow while
(10:05):
freeing up capital to invest insustainable growth initiatives
in our pharmacy and healthcarebusinesses, which we believe
will ultimately improveshareholder value.
Okay, so end quote.
So that was the quote from theCEO of Tim Wentworth.
Ceo of Walgreens.
Basically, what the CEO issaying here is that the company
(10:30):
decided to cut the dividend toimprove its cash flow.
So it looks like the company isin some type of financial
trouble where they don't haveenough cash to pay the
shareholders.
So they're going to keep thatcash for themselves, reinvest it
into the business to grow theirbusiness.
So ultimately, what he says inthe last sentence there is to
(10:54):
improve shareholder value at theend of the day.
So how are you going to do that?
You got to get the share priceto come back up again.
Hopefully, increasing thedividend again will also help to
bring the share price up again.
So the motivation seems fine.
The company is doing what itcan, it's cutting costs and it's
doing what it can to be in abetter financial situation in
(11:19):
the future.
So then, what do you do now Forthose of you who have shares in
Walgreens or are consideringbuying shares in Walgreens so
that's our next topic in thisepisode Do you buy, sell, hold
or skip this company altogether?
Now I'm not going to be able toget into specifics, specifics
(11:42):
regarding your personalsituation.
I can't do that.
I don't know who you are, howbig your investments are, how
long you've been investing inthe company, so we can't get
into specifics.
I will have a discussion inthis episode and provide you
some guidelines, some ideas, andhelp you to make your own
(12:05):
decision.
Now there's many factors toconsider here.
Number one is going to be yourown risk tolerance.
Do you hang on to the shares?
What if they continue to drop?
What if they cut the dividendagain?
Or what if now is a good timeto buy because the stock price
is low, the dividend yield isgood, maybe the stock has
(12:27):
nowhere to go but up from here.
So that's going to all dependon your own risk tolerance.
Are you able to sleep at nightwith the decisions, the
investing decisions, that you'vemade?
Number two factor to consider isare you a beginner, are you an
intermediate or experiencedinvestor?
Do you have a portfolio ofmaybe five stocks or do you have
(12:49):
a portfolio of 45 stocks?
So that's all going to depend.
And if you, you know, did youjust start investing recently or
have you been investing for thelast 25 years?
And if, as an experiencedinvestor, I've seen this before.
I've seen it with othercompanies where the dividend
gets cut.
But based on my experience, I'mnow able to make better
(13:11):
decisions going forward.
And then the other things toconsider are you know how many
other dividend stocks do you own?
Is this the only stock that youhave that pays dividends, or do
you have other ones?
So, even though the dividend hasgone down 48% for Walgreens, is
it negatively going to affectyour overall portfolio or not,
(13:32):
because the other companiesmight have increased their
dividend to offset, you know,the 48% decrease with Walgreens?
How long have you held theshares.
So anybody who's bought theshares 10, 15 years ago is still
making money, right, they wouldhave collected all the
dividends over the last 10, 15years and the share price was
(13:52):
much lower 10, 15 years ago thanit is today.
So they're still.
They're doing fine, they'restill making money.
But if you just bought it ayear ago, six months ago, it's
going to be a completelydifferent story.
And the other factor toconsider is how much you have
invested in WBA.
Is it $500 or is it $50,000 inthis company?
(14:15):
So that's also going to weighon your decision whether to buy
or sell.
And there are a couple ofunknowns here.
I've already mentioned thembefore, but let's go through
them again.
So there's five of them herethat I listed on the screen.
Will the dividend get reducedagain?
We don't know.
(14:36):
That's an unknown.
Will the dividend geteliminated completely altogether
this year?
We don't know that either.
Or will the dividend go up,right?
So that's an unknown.
How will the stock price react?
Is the price going to keepgoing down or is the price going
to start to come up now thatthe company says they're
positioning themselves to be ina better financial situation?
(14:58):
So we don't know if the priceis going to go up or down.
Will the company turn around,be successful?
Because that's what theexecutive team at Walgreens is
hoping and that's what they'reworking towards is to turn this
around and make it a financiallyhealthy company.
But will it take six months?
Will it take a year?
(15:19):
Will it take two years?
We don't know.
So there's a whole bunch ofunknowns here.
So you're watching this episode,you're listening to this
episode, because we said we weregoing to talk about so what do
you do now?
That's the question.
So I'm going to keep it general.
Again, it's not going to bespecific to your needs.
I'm going to keep it general.
(15:41):
So here are some suggestions.
So if you don't own the companyright now, I would skip it for
now, just because when we invest, we want to minimize our risk
as much as possible.
So here's a company that hasjust cut their dividend.
Their earnings are negative andwe don't know what's going to
(16:01):
happen in the next six months toa year.
Is the price going to go down?
Are they going to cut thedividend again?
We just don't know.
Versus a company that has notcut its dividend, some other
company that has increased itsdividend?
That's probably a safer choicethan what's happening with
Walgreens today.
(16:21):
So we want to make the saferchoice out of the two.
So if you don't own it, skip itfor now.
That's probably a good generalguideline for most people.
Now the current stock pricetoday, as of this recording, is
$22.90.
The current dividend yield is4.4%.
So if you bought the shares forless than $22.90, so maybe you
(16:47):
were lucky and you bought somewhen the stock price was at $20
or at $21.
So if you bought it for lessthan what it's trading at today,
you may consider sellingbecause you're not going to lose
any money.
You're probably just going tobreak even, maybe even a little
bit of a profit if you bought itat $20 and it's trading at $22.
Sorry, and if it's trading at$22 today, you're not going to
(17:13):
lose any money on that.
So that would be a quickdecision.
You're not going to loseanything.
You may consider selling Againto avoid any future dividend
cuts.
That may or may not happen, wedon't know.
Again, it's all aboutminimizing your risk.
(17:34):
Now I've gotten some questions.
I've gotten some emails frompeople who bought the stock when
it was very high.
They bought it at $40 a shareor even $50 a share back in 2022
.
So for those folks, they wantto know what they should be
doing now.
So what do you do so in thissituation?
(17:54):
You know, personally I hate tolose money.
I just hate it.
So if you're in that ballparkand you feel the same way, you
may consider just holding it Now.
Hopefully, this is more forexperienced investors, investors
(18:15):
who have been doing this formany, many years.
You already have a good sizeportfolio.
You're already generatingdividend income from other
dividends and those dividendshave gone up.
You may consider holdingbecause if the company can turn
this business around, then thestock price will eventually come
(18:36):
back up and the dividend,hopefully, will go up again.
And I'm going to show you anexample right after this.
So hang in there.
Let's look at the other exampleI'm going to show you right
after this.
But so if you bought it at ahigh price, you may consider
holding.
The other option is you may wantto sell, but if you do, you are
going to solidify those losses.
That's entirely up to you.
(18:58):
You might be thinking, well, Ican sell it, take those losses
Now.
I can put that into somethingelse that's going to provide me
with a better yield and we havehigher confidence that their
dividend will go up over time.
So you may want to do that.
So it's a bit of a judgment call.
(19:18):
I already identified thefactors that might affect your
decision and I've identified theunknowns that are out there.
So I'm sorry, I can't be morespecific.
And you also want to consideryou know your if you bought it
at $50, two years ago or fiveyears ago at a high price and
(19:41):
now it's at 22,.
You also want to consider thedividends you would have
accumulated over those years,let's say over the last five
years.
So how much did you get individends?
So just don't look at the stockprice that you bought it at and
the stock price today.
Consider the dividends thatyou've had over the last four or
five years and then take a lookat what your losses would
(20:05):
actually be if you were to sellthe stock today.
So that's why it's going to bevery the decision is going to be
very specific to you and youalone.
Okay, so I want to share withyou two personal stories of mine
that may help sway yourdecision, or maybe not, because
both of these stories arecomplete opposites of each other
(20:27):
.
So General Electric is one.
So I still own those sharestoday.
I've had them for many, many,many years and over the last
couple of years the company hashad a number of dividend cuts.
I've kind of lost track.
I think there was three cuts,maybe four, but I know three for
(20:47):
sure dividend cuts.
So the company cut the dividendthe first time and I held on to
it and I said, you know, Ithink it'll, they can turn this
around, the dividend will comeback.
This is a large corporation,it's not going anywhere, it'll
be fine.
And then they made anotherdividend cut and then the stock
price dropped even more and thenit got into a position where,
(21:11):
like I said before, personally Ihate to lose money.
So I said, okay, well, I'lljust hang on to it.
But then, after the third cut,the price dropped even more and
now I'm not interested inselling it now and again, it's
not a huge investment.
I forget the exact number,maybe it was $2,000 total in
General Electric.
(21:31):
So at this point it's it's gonedown too far that I'm just
going to hang on to it.
It doesn't negatively affect myportfolio.
I have a lot of other dividendstocks that grow their dividend
every year.
So General Electric did nothave a happy ending Now it could
(21:51):
.
Maybe in the next five, six, 10years maybe it'll come back up
again, but as of today it's it's.
It has not been a goodperforming stock for me.
On the other hand, tc Energy iscompletely the opposite, and TC
Energy also cut their dividendin 2000.
(22:12):
And then you can see it up onthe screen here right.
So now I'm not going really toofar back.
So on the screen you can see in1994, the company was paying an
annual dividend of $0.94 ashare.
The year after that theyincreased the dividend to $1.02.
And then after that, the yearafter that, the dividend went up
(22:33):
again.
But in 1998, and maybe thatwould have been a yellow flag in
1998, the dividend stayed thesame.
So the company didn't increaseit, they just kept it the same.
But in 1999, they reduced thedividend, so it went from $1.18
a share to $1.12 a share.
And then in 2000, they reducedthe dividend again.
(22:56):
So there was two dividend cuts.
And so in 2000, the dividendwas 80 cents a share.
So that scared away a lot ofinvestors.
The stock price came down quitea bit and I happened to buy
shares in TC Energy in 2000,after the second dividend cut
(23:16):
was made and again it wasn't ahuge investment.
It was $2,479 total.
But you can see here thecompany has increased its
dividend every single year since2000.
So we're looking at 24 years ofconsecutive dividend increases
(23:36):
after those last two cuts thatthey made.
So here the company was able toturn itself around financially
and then they started increasingthe dividend.
So in 2000, the dividend was 80cents a share.
The annual dividend and as ofthis recording it is $3.72 a
share and, if you recall, Iinvested $2,479 in this company.
(24:02):
This company has now providedme with over $8,700 in dividends
and you can see that up on thescreen here.
So this was a success story.
So there you have it.
I've given you kind of bothsides of the coin general
electric and TC energy.
So where is Walgreens going tofall into this?
(24:24):
Is it going to be like GE or isit going to be like TC energy?
So nobody knows.
But let's just get back to ourspecific example that we're
discussing in today's episodewith Walgreens.
So some of you want to knowwere there any early warning
signs?
(24:44):
Was there something that couldhave told us that maybe a
dividend cut was coming?
So maybe we can learn from thisexperience and we can apply it
to the stocks that we own today.
And so the answer is yes.
There was some early warningsigns and we can see here up on
the screen.
There was three major signs hereWalgreens EPS, which is the
(25:10):
earnings per share, was actuallynegative in three out of the
last five quarters.
So that should be a yellow flagwhen the company is losing
money.
Sometimes it's fine to see theearnings drop, like one time in
a year, and then it goes back upagain, because we're always
looking at the last 20 years.
(25:31):
We want to see the earningsgrowing over a long period of
time, so one or two dips in theearnings is fine.
But in this case, if you lookat the last five quarters, you
can see that the earnings werenegative at three out of the
last five quarters.
So that's pretty bad.
The earnings were down, andwhat happened is, when the
earnings come down, the payoutratio goes over 100%, and for
(25:55):
those of you that are interested, I have an entire episode
talking about payout ratio.
That's an episode two, so youcan go ahead and watch that to
learn more about the payoutratio itself.
So the payout ratio being over100% was another yellow flag
like something is going on here.
The company is not makingenough money to pay the
(26:16):
shareholders, so something hasto happen to the dividend.
And then, finally, the lastthing was, if you look at the
previous year, 2023, there wasno increase in the quarterly
dividend.
So here was a company that hada dividend streak of 47 years of
(26:37):
consecutive dividend increases,but in 2023, they did not
increase the dividend at all,the quarterly dividend.
So if you look at the last fourquarters, the dividend remained
at 48 cents a share.
So that would have been anotheryellow flag.
So these are the three thingsto look for, even in stocks that
you own today, because it'llgive you some guidance and some
(27:02):
early warning signs that maybe adividend reduction is coming.
Now, there is one silver liningin all of this, okay, and that
has to do with the dividendaristocrats.
So, for those of you notfamiliar with the dividend
aristocrats, it's a list ofcompanies and there's only two
(27:22):
things that you need to meet therequirements to get into this
list.
So, number one you need to bepart of the SNMP 500 index.
So they're US companies.
If you're part of the SNMP 500index, that gets you one step of
the way there.
The other thing is you musthave at least 25 years of
consecutive dividend increases.
(27:44):
So if you meet those tworequirements, you are then
considered a dividend aristocratIn 2023, there were 68
companies in that list.
Now the good news is, 64 out ofthe 68 companies increased their
dividends.
Three companies kept thedividend unchanged and one of
(28:08):
them cut the dividend, and thatwas Walgreens.
So that's not bad.
The majority of companies thatare in the dividend aristocrat
list increased their dividends.
In fact, it was 64 out of the68 companies in the list grew
their dividend, but all of themedia attention always falls on
(28:29):
the one or few companies thatcut their dividend altogether.
So this brings us to the lasttopic in this episode, and it's
the importance ofdiversification.
So the key here is not to putall your eggs in one basket, so
diversification is the key.
(28:50):
Over time, you want to be ableto build your portfolio
consisting of companies in allof these 11 sectors you see up
on the screen here Access,energy materials, industrials,
consumer discretionary, consumerstaples, health care,
(29:10):
financials, informationtechnology, communication
services, utilities and realestate.
Now, this is not going tohappen overnight.
You can't do this right away.
It takes a few years to build awell diversified portfolio.
So you want to diversify acrossdifferent sectors so that, in
(29:30):
case one sector is down and it'sdragging all of the stocks down
, it doesn't negatively affectyour portfolio.
And you also want to make surethat you're investing in other
dividend stocks so that if youdo have a company which in this
case we've seen it's rare, butyou do have a company that cuts
(29:51):
its dividend again, it's notgoing to negatively affect your
overall dividend income that'sbeing generated by the portfolio
.
I've been doing this for over 24years and I can tell you that
my dividend income has gone upevery single year, and that's
including 2008, 2009.
We had the financial crisis,including COVID, in March of
(30:14):
2020.
The dividend income has gone upevery single year, so
diversification is going to helpyou to lower your risk.
So does this mean that youshould go out today and just buy
one dividend stock out of eachof these 11 sectors?
And the answer is no.
You want to make sure thatyou're buying not just any
(30:37):
dividend stock, but that it's ahigh quality dividend stock and
not just at any price.
You want to make sure that it'spriced low.
So how do you know, when you'relooking at a company, if it's a
high quality company, and howdo you know that it's priced low
?
So for that I've created what Icall the 12 rules of simply
investing.
This becomes your checklist.
(30:59):
If a company fails even onerule, skip it, move on to
something else.
And this list, this 12 rules,are going to help you to lower
your risk and help you makebetter investing decisions.
So let's take a look at them.
They're up on the screen here.
Rule number one is do youunderstand how the company is
(31:20):
making money?
If not, skip it, move on tosomething else.
20 years from now, will peoplestill need its product and
services?
That's rule number two.
Rule number three does thecompany have a low cost
competitive advantage?
Rule number four is itrecession proof?
Rule number five is itprofitable?
And we talked about earnings inthis episode.
Negative earnings is not good.
(31:42):
Number six does the companygrow its dividend?
And so we talked about dividendcuts in this episode as well.
Rule number seven can thecompany afford to pay the
dividend?
And rule number eight is thedebt less than 70%?
And rule number nine avoid anycompany with a recent dividend
cut.
So there you go.
That answers the question ofwhat to do with Walgreens today,
(32:04):
especially if you're juststarting to build your dividend
portfolio.
Rule number 10, does thecompany buy back its own shares?
Rule number 11 is the stockpriced low.
So we look at the P-E ratio, welook at the P-B ratio and then
we also look at the currentdividend yield and compare it to
the company's 20-year averagedividend yield.
(32:25):
And then rule number 12, keepyour emotions out of investing.
So, for those of you that areinterested, I've created the
Simply Investing course.
It's a self-paced online course, it's in 12 modules and it's
going to help you become abetter and successful investor.
(32:46):
In module one, we start withthe investing basics.
Module two, we cover the 12rules of Simply Investing in
detail, with real life examples.
In module three, you learn howto apply the 12 rules yourself.
Module four we look at theSimply Investing platform.
In module five, you learn howto place your first stock order
(33:06):
if you've never done it before.
Module six building and trackingyour portfolio.
Module seven when to sell.
Module eight reducing your feesand risk, hopefully when it
comes to mutual funds, indexfunds and ETFs.
Module nine your action plan togetting started immediately.
And in module 10, I answer yourmost frequently asked questions
(33:28):
.
So we also have the SimplyInvesting platform, which is an
online web app.
It applies the rules to over6,000 companies in the US and in
Canada every single day, so youcan immediately see which
companies to avoid, the onesthat are overvalued or priced
high, and which ones to consider.
(33:50):
So if you're interested, youmay want to write down the
coupon code SAVE10SAVE10.
Save10 is going to save you 10%off of our course and the
platform as well.
If you enjoyed today's episode,be sure to hit the subscribe
button.
Hit the like button as well.
We have new episodes out everyweek and for more information,
(34:14):
take a look at our website,simplyinvestingcom.
Thanks for watching.
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