Walgreens Boots Alliance (Nasdaq: WBA) boasts an enormous 9% yield. But it’s not because management is overly generous with the dividend. It’s because the stock has gotten hammered over the past two years.On top of that, the company’s free cash flow has practically disappeared.So… can it maintain such an attractive dividend?During the pandemic, Walgreens’ free cash flow was strong, thanks in part to the number of people who received COVID-19 vaccines at its pharmacies.But in the company’s fiscal 2023, which ended in August, selling, general, and administrative expenses soared, which caused its net income to be negative for the year.The company had been profitable in prior years, and it is forecast to be profitable again in fiscal 2024. Due to this positive net income projection and a planned $600 million reduction in capital expenditures, next year’s free cash flow is expected to be significantly higher than this year’s.The Safety Net model does consider future expectations, but it leans much more heavily on past performance. And Walgreens’ past performance stinks.Free cash flow declined in each of the past two years. And because free cash flow was nearly nonexistent in fiscal 2023 at just $141 million, the $1.7 billion Walgreens paid in dividends during the year made for an unsustainable payout ratio of more than 1,200%.In other words, Walgreens’ total dividend payout was 12 times more than the amount of cash it brought in.This was a very bad year for Walgreens, and its financials took a big hit. As a result, so did its dividend safety rating.If Walgreens can deliver the free cash flow that it’s currently projecting for next year, the dividend could be okay.But until it proves that it can generate that level of cash flow, the dividend cannot be considered safe.

Dividend Safety Rating: D
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