This Under-the-Radar Healthcare Stock Yields Nearly 8.5%. Here's Whether That Income Is Too Good to Be True.

Perrigo (NYSE: PRGO) sounds like it should have a highly consistent business. But recent performance has been weak. And the CEO just abruptly left, leaving a temporary CEO in place as the company looks for a replacement. There's a reason why the stock yields 8.3% today. And before you jump on that yield, thinking you've found a great income opportunity, you should consider the risks you are taking on. Here's a quick list.

What does Perrigo do?

Perrigo makes over-the-counter drugs. It owns some of its own brands, but the real business is making private-label generic drugs. For example, if you don't want to pay the full fare for Procter & Gamble's (NYSE: PG) NyQuil, you may opt for the generic version available at your store. That store doesn't own a generic drug factory; it buys generics from a third party, such as Perrigo. In theory, this should be a highly consistent consumer staples business.

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However, Perrigo just reported pretty weak second-quarter 2026 earnings. Core sales fell 3.1% year over year. Organic sales dropped 3.5%. And core earnings declined nearly 21%, to $0.46 per share. Notably, the company's adjusted gross margin declined 2.5 percentage points, and its adjusted operating margin dropped 1.6 percentage points. That said, it did pay its $0.29 per share dividend, which still looks well covered by core earnings.

Perrigo: Dividend risks you shouldn't ignore

The first major risk to consider with Perrigo is its weak financial performance. Consumers are under stress right now, thanks to inflation that is running higher than usual. You might expect shoppers to be trading down to store brands, which should bolster Perrigo's top line. That obviously didn't happen in the most recent quarter. In fact, the company's top line has basically been trending lower for more than a decade. That's a problem.

Then there's the weakness in gross and operating margins. In the earnings release, Interim President and Chief Executive Officer Albert Manzone explained: "We continued to execute our Three-S plan in the second quarter, strengthening areas of the business within our control, improving operational performance, streamlining our portfolio, and further reducing debt." There's a lot to parse here, but the weak margins hint that the Three-S plan may not be going as smoothly as hoped.

Speaking to the streamlining effort, the company is selling non-core assets. That's not a bad move, but it means the company is shrinking. There could be more asset sales to come, as well, as the company is currently evaluating its infant formula and oral care businesses. From an income investor's perspective, you have to consider the possibility that a smaller business may not be able to support the same dividend as before. Proceeds from asset sales are likely to be used for debt reduction, but don't ignore the fact that a very easy way to free up cash for that same purpose is to cut the dividend.

Which brings up what may be the biggest risk of all. The above comment came from the interim CEO. In early June, the company's former CEO abruptly left. A search is on for a replacement, which is what you would expect. But until a permanent CEO is found and that person has explained their business plan, Perrigo's future is up in the air. And, often, a new CEO comes in and cleans house, which may include a dividend cut, to set themselves up for future success.

Too many moving parts and too much uncertainty

Perrigo is a turnaround story right now. If you don't dig too deeply, it sounds like the lofty yield is a worthwhile risk. But once you start to scratch the surface, warning signs quickly begin to appear, from a shrinking business to weak financial results. At the very least, dividend investors should stay on the sidelines until a new CEO is found and has enumerated their near-term and long-term plans for the company. If you step in too early, you may find yourself saddled with a dividend cut.

Reuben Gregg Brewer has positions in Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.