Stock Analysis

Why It Might Not Make Sense To Buy McKesson Corporation (NYSE:MCK) For Its Upcoming Dividend

  •  Updated
NYSE:MCK
Source: Shutterstock

McKesson Corporation (NYSE:MCK) stock is about to trade ex-dividend in four days. If you purchase the stock on or after the 1st of March, you won't be eligible to receive this dividend, when it is paid on the 1st of April.

McKesson's next dividend payment will be US$0.42 per share, on the back of last year when the company paid a total of US$1.68 to shareholders. Calculating the last year's worth of payments shows that McKesson has a trailing yield of 0.9% on the current share price of $180.58. 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.

See 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 reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 5.4% of its free cash flow as dividends last year, which is conservatively low.

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

historic-dividend
NYSE:MCK Historic Dividend February 24th 2021

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. McKesson has delivered an average of 8.8% per year annual increase in its dividend, based on the past 10 years of dividend payments.

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

The Bottom Line

Is McKesson worth buying for its dividend? It's hard to get used to McKesson paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of McKesson don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for McKesson (1 is a bit concerning) you should be aware of.

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’re looking to trade McKesson, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether McKesson is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis