McKesson Neglects Shareholders As It Takes Care Of Management

| About: McKesson Corporation (MCK)

Summary

I run a dividend analysis on McKesson.

McKesson's buyback program was successful in reducing outstanding shares, but was not a wise use of their cash.

McKesson's use of cash shows they care more about management than they do investors (and employees).

I recently received a reader request to look into McKesson (NYSE:MCK):

Hello Damon,

Good article. I'm going to take you up on your offer to write an article on your thoughts on a stock. How about MCK (McKesson) and/or CMI (Cummins). Thanks!

Matt

MCK is an interesting stock because of its high price but relatively low yield. I've found, through digging around in forums and comments on the stock, that many hold MCK because of its strong fundamentals, its consistent dividend growth, and its buyback program. Truth be told, an analysis of these three aspects shows the company to be weaker than its peers.

Allow me to run through this analysis as if I were running a dividend analysis, as all my points are contained within.

MCK Dividend Analysis

The dividend increases have been sporadic at best:

It's as if the management has no plan for the dividend but plays things by ears (or by balance sheet). Still, we've only seen increases, and no cuts to this point. This shows strength in dividend increases but no real reliability for dividend growth investors.

As for dividend growth versus stock growth, we see dividend growth outpacing stock growth in terms of sporadic bursts:

I have no doubt that MCK and its dividend trend have become uncoupled. Unfortunately, this removes one predicative tool from our arsenal. Using the dividend to predict stock growth speed will fail.

Notably, the stock has taken a tumble, bursting along with the biotech bubble. The tumble might not have been justified - that depends on how much artificial price inflation you attribute to the bubble and how much growth you attribute to the fundamentals. In addition, we have buybacks, which have certainly raised the price of the stock to artificial levels - buybacks do not add any value to the company but simply reclaim shares.

This buyback program was particularly successful:

In October, MCK authorized a new $2B buyback program. I feel this money could have been better spent. In essence, the buyback program does nothing but raise the price of the stock with the side benefit of reducing dividend payouts.

However, as you will see, dividend payouts are not a problem:

This yield is so absurdly low that no dividend investor would ever take a second look. But if not pay a healthy dividend, what is MCK's plan. Are they positioning themselves as a growth stock, using the buybacks to inflate the price?

Or perhaps they want to become a value stock without a dividend - a stock with a healthy balance sheet that does nothing but slowly grow? Few investors would be interested in such a stock, so taking this route is awkward. But the fundamentals certainly are looking well; revenue is back on the incline:

The fundamental aspect I mentioned in the intro relates to income, which is steadily rising. The income has covered the dividend for a long time:

This leads us to ask why the dividend has been kept so low? If the dividend only occupies 15% of MCK's income, why doesn't the company raise its dividend? This is a strange stock indeed:

EPS has grown considerably, but the stock has reversed and the dividend has barely moved. Free cash flow has had its hard times but not so in recent times:

A running average of the free cash flow gives a better estimate for the cash on hand and therefore MCK's ability to pay the growing dividend:

Again, we see no problems here. MCK seems cash rich, yet they are seemingly unwilling to spend their free cash on anything but buybacks. Why not dividend increases?

Closing Thoughts

If not raise the dividend, just what has MCK done with its money? Considering they are firing nearly 2,000 employees, they certainly aren't using that cash to encourage their workforce. But they have recently acquired Rexall Health, a Canadian drug store.

Whether Rexall was a good acquisition remains moot. The fact remains: MCK is attempting to expand with its acquisitions, including two oncology companies. The company's money is funneled into acquisitions and buybacks but not dividend hikes.

The company could easily double the dividend twice without needing to raise debt. The question is why they've set their growth at such a low rate. It seems as though they care less about the investors than they do the insiders. When you look at the money funneled to management, you begin to see the bigger picture.

MCK's CEO is the second-highest paid CEO. In light of the firing of 2,000 employees, this shows a possible distain for "the little people," including you, the average investor. If you cannot afford to pay your employees, you probably cannot afford to pay your shareholders, either.

Clearly, the buybacks were mostly at a premium, as the stock has dropped considerably even after the buyback program. MCK seems to be wasting its mountains of money on management, artificial stock inflation (possibly to help those in management with stock options), and on so-so acquisitions. Eventually this must come to an end, for better or for worse.

Until that time, stay out of MCK… unless you're really hankering for a 0.7 % yield.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.