McKesson - Meet The New Dividend Stock On My Watchlist

Core Viewpoint - McKesson Corporation has experienced a significant stock price decline recently, but its long-term performance remains strong, with a 2,700% return since January 2000, outperforming both the healthcare ETF and the S&P 500 [2][4]. Company Overview - McKesson, founded in 1833, has a market cap of $67 billion and is recognized for its role in improving health outcomes by partnering with various stakeholders in the healthcare sector [5]. - The company operates through four main segments: U.S. Pharmaceuticals, Prescription Technology Solutions, Medical-Surgical Solutions, and International operations [5][6]. Business Segments - U.S. Pharmaceuticals: This segment generated $72 billion in revenues in Q1 of fiscal 2025, providing distribution services for a wide range of drugs and serving about one-third of all pharmaceuticals in the U.S. [5][6]. - Prescription Technology Solutions (RxTS): Focuses on medication access and affordability, helping patients save $8.8 billion on medications in fiscal 2024, with an 18% operating margin in Q1 2025 [6]. - Medical-Surgical Solutions: Provides medical supply distribution services to over 285,000 customers, including physician offices and nursing homes [6]. - International Operations: Includes pharmaceutical distribution in Canada and Europe, with nearly 2,700 pharmacies in Canada [6]. Competitive Position - McKesson has a "narrow moat" due to high switching costs and strong relationships with key customers like CVS, which accounted for approximately 28% of its 2024 sales [7]. - The company faces competition from Cencora and Cardinal Health, but has outperformed these competitors over the past five years [7]. Financial Performance - In Q1 of fiscal 2025, McKesson reported $79.3 billion in sales, a 6% increase from the previous year, and raised its full-year EPS guidance from $31.25-$32.05 to $31.75-$32.55 [10][11]. - The company is integrating AI into its operations to improve efficiency and reduce costs, contributing to margin growth [10][11]. Shareholder Returns - McKesson's board approved a 15% increase in its quarterly dividend to $0.71 per share, supported by a low payout ratio of 9% and a five-year dividend CAGR of 10.2% [19][21]. - The company has a buyback authorization of $10 billion, representing about 15% of its market cap [21]. Valuation - McKesson's stock trades at a blended P/E ratio of 15.7x, with expected EPS growth of 17% this year, making it attractive compared to its peers [23]. - A fair stock price estimate of $640 suggests a potential upside of 23% from the current price [23]. Investment Outlook - The recent stock sell-off presents a compelling opportunity for long-term investors, with McKesson's strong position in healthcare distribution and focus on technology supporting sustainable growth [26]. - Despite short-term headwinds, the company's solid business model and shareholder return strategies enhance its investment appeal [27].