Stock Analysis

McKesson (NYSE:MCK) Will Pay A Larger Dividend Than Last Year At US$0.47

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NYSE:MCK
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McKesson Corporation (NYSE:MCK) will increase its dividend on the 1st of October to US$0.47, which is 12% higher than last year. Even though the dividend went up, the yield is still quite low at only 0.8%.

Check out our latest analysis for McKesson

McKesson Might Find It Hard To Continue The Dividend

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Even though McKesson isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. 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.

Over the next year, EPS might fall by 54.3% based on recent performance. 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 August 3rd 2021

McKesson Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from US$0.72 in 2011 to the most recent annual payment of US$1.68. This works out to be a compound annual growth rate (CAGR) of approximately 8.8% a year over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

Dividend Growth Potential Is Shaky

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though McKesson's EPS has declined at around 54% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in.

Our Thoughts On McKesson's Dividend

In summary, while it's always good to see the dividend being raised, we don't think McKesson's payments are rock solid. 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. We don't think McKesson is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. 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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