Stock Analysis

McKesson (NYSE:MCK) Is Increasing Its Dividend To US$0.47

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NYSE:MCK
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The board of McKesson Corporation (NYSE:MCK) has announced that it will be increasing its dividend on the 3rd of January to US$0.47. Even though the dividend went up, the yield is still quite low at only 0.9%.

See our latest analysis for McKesson

McKesson Might Find It Hard To Continue The Dividend

If it is predictable over a long period, even low dividend yields can be attractive. While McKesson is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Looking forward, earnings per share could 62.2% over the next year if the trend of the last few years can't be broken. While this means that the company will be unprofitable, we generally believe cash flows are more important, and the current cash payout ratio is quite healthy, which gives us comfort.

historic-dividend
NYSE:MCK Historic Dividend November 1st 2021

McKesson Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2011, the dividend has gone from US$0.72 to US$1.88. This means that it has been growing its distributions at 10% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

Dividend Growth Potential Is Shaky

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Over the past five years, it looks as though McKesson's EPS has declined at around 62% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for McKesson that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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