McKesson Corporation (NYSE:MCK) will increase its dividend on the 1st of October to US$0.47. Although the dividend is now higher, the yield is only 0.9%, which is below the industry average.
McKesson Might Find It Hard To Continue The Dividend
Even a low dividend yield can be attractive if it is sustained for years on end. 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. This gives us some comfort about the level of the dividend payments.
Over the next year, EPS might fall by 62.2% 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.
McKesson Has A Solid Track Record
The company has an extended history of paying stable dividends. The first annual payment during the last 10 years was US$0.72 in 2011, and the most recent fiscal year payment was US$1.88. This implies that the company grew its distributions at a yearly rate of about 10% over that duration. Rapidly growing dividends for a long time is a very valuable feature for an income stock.
Dividend Growth Potential Is Shaky
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though McKesson's EPS has declined at around 62% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.
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.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for McKesson that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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What are the risks and opportunities for McKesson?
Trading at 25.5% below our estimate of its fair value
Earnings are forecast to grow 6.5% per year
Became profitable this year
Has a high level of debt
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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