Warren Buffett loves this passive income stock
McKesson (MCK 0.34%), a leading distributor of pharmaceutical and medical supplies, is a favorite with institutional investors. This includes Warren Buffett Berkshire Hathaway, who owns 3.2 million shares of the company, which are worth more than $1.1 billion. Berkshire Hathaway initiated its position in McKesson in the first quarter of this year by buying nearly 3 million shares, then adding 276,000 more and the second trimester. He did not buy any additional shares of McKesson in the third quarter, but maintained his position.
The stock is up more than 48% so far this year and there are plenty of reasons Buffett might like it, including strong top line and bottom line results. The company has increased annual revenue by 116% over the past 10 years and increased annual earnings per share (EPS) by 29% over the same period.
Stock is also a reliable source of passive income. The company has increased its dividend for 15 consecutive years and has increased the quarterly payout by 170% over the past decade.
McKesson has increased its quarterly dividend by 15% this year to $0.54 per share, giving it a yield of just under 0.6%. That’s below the S&P 500 average (1.82%), but with a cash dividend payout ratio of just 7.14%, it’s extremely safe and has plenty of room for growth. McKesson completed $1.5 billion in share buybacks in the last quarter, with another $5.8 billion authorized for the remainder of the fiscal year. This is good news for shareholders because redemptions reduce the number of shares, increasing earnings per share.
McKesson reported quarterly results Nov. 1, reporting revenue of $70.2 billion, up 5% year-over-year, and EPS of 6.46. $, up 278% from the same period a year ago. The company also raised its full-year guidance for Adjusted EPS from $24.45 to $24.95, up from the previous estimate of between $23.95 and $24.65.
Streamline your business
McKesson attributed the revenue growth to an increase in its U.S. pharmaceuticals segment, which saw revenue jump 12% from the same period last year as the company said it had more product sales. specialty products and that its retail customers have increased the volume of their orders. Its prescription technology solutions segment reported revenue of $1 billion, up 9% year-on-year, driven by higher technology services revenue and increased prescription sales in the Company’s third-party logistics business.
Revenue fell 25% from its international segment, to $6.9 billion. This is due to the company’s decision to streamline its overseas operations. It has already divested in 11 of the 12 European countries in which it operates, selling to the Phoenix group. The only country with which it is still in the process of divesting its European activities is Norway.
The company said it expects revenue growth of 12-15% this fiscal year for its U.S. pharmaceutical segment and revenue growth of 10-16% for the prescription technology solutions segment. Its forecasts foresee a drop of 4% to 8% over the year for its medical solutions segment, and, thanks to its European disposals, a drop of 42% to 46% in the international segment.
The hunt for extra income
McKesson made some big moves in the last quarter that could help it boost its long-term revenue. On Nov. 1, he closed his deal to buy RxSavings Solutions, which works to bring transparency to prescription pricing, for up to $875 million.
RxSavings Solutions is a 10-year-old Kansas City-area startup that uses software to help consumer and employer health plans save money on prescription drug costs. It has 17 million members and made around $40 million in revenue in 2021. The idea is that McKesson’s resources will help RxSavings grow its membership, and the company should fit in well. in McKesson’s Prescribing Technology Solutions segment.
McKesson has also extended its partnership to distribute pharmaceutical products to SVC Health through 2027. CVS is McKesson’s largest customer, as the company supplies medications to CVS Health’s Caremark postal and specialty pharmacies. The two companies have worked together since 2001, and in fiscal 2022, the deal with CVS Health was responsible for 21% of McKesson’s revenue.
The Health care The company is also focusing more on its oncology offerings. It is expected to enter into a joint venture with the Sarah Cannon Research Institute of Health HCA to sponsor clinical research in oncology and accelerate drug development. As part of the partnership, McKesson purchased Genospace, which uses genomics to do precision medicine, particularly in oncology, and works to improve the process of matching patients for clinical trials.
Why Buffett May Like the Stock
Since Warren Buffett’s Berkshire Hathaway bought the stock in the first and second quarters, many investors have been interested in the company. Buffett likes to invest in stable businesses, and McKesson offered a reasonable price. Even with its shares on the rise, McKesson is trading for just 25 times earnings. It’s a solid company with a lot of growth potential. He rewarded investors with stock buybacks and steady dividend increases.
While there are always concerns about how a possible recession might hit the market, if you own McKesson shares, that’s less of a concern because its diversity of income sources protects it against a market downturn. And it deals with prescription drugs, which people have to take, whether the economy is good or bad.
Jim Halley has positions in CVS Health. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends CVS Health, CVS Health Corporation, HCA Healthcare, and McKesson and recommends the following options: long buy $200 in January 2023 on Berkshire Hathaway (B shares), short buy $200 in January 2023 on Berkshire Hathaway (stock B) and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.