Here’s Why We’re Wary Of Buying McKesson Corporation’s (NYSE:MCK) For Its Upcoming Dividend

Readers hoping to buy McKesson Corporation (NYSE:MCK) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 28th of February in order to be eligible for this dividend, which will be paid on the 1st of April.

McKesson’s upcoming dividend is US$0.41 a share, following on from the last 12 months, when the company distributed a total of US$1.64 per share to shareholders. Looking at the last 12 months of distributions, McKesson has a trailing yield of approximately 1.0% on its current stock price of $170.96. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.

Check out our latest analysis for McKesson

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. McKesson lost money last year, so the fact that it’s paying a dividend is certainly disconcerting. There might be a good reason for this, but we’d want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If McKesson didn’t generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. What’s good is that dividends were well covered by free cash flow, with the company paying out 9.5% of its cash flow last year.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

NYSE:MCK Historical Dividend Yield, February 23rd 2020
NYSE:MCK Historical Dividend Yield, February 23rd 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. McKesson reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, McKesson has increased its dividend at approximately 13% a year on average.

We update our analysis on McKesson every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Should investors buy McKesson for the upcoming dividend? First, it’s not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow.” It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Ever wonder what the future holds for McKesson? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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