Published on July 23rd, 2022 by Felix Martinez
Berkshire Hathaway (BRK.B) has an equity investment portfolio worth more than $360 billion as of the end of the 2022 first quarter.
Berkshire Hathaway’s portfolio is filled with quality stocks. You can ‘cheat’ from Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.
You can see all Warren Buffett stocks (along with relevant financial metrics like dividend yields and price-to-earnings ratios) by clicking on the link below:
Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.
As of March 31, 2022, Buffett’s Berkshire Hathaway owned just over 2.9 million McKesson Corp. (MCK) shares for a total market value exceeding $965.53 million. McKesson Corp. currently constitutes over 0.3% of Berkshire Hathaway’s investment portfolio.
This article will thoroughly examine McKesson Corp’s prospects as an investment today.
McKesson Corporation traced its lineage to 1833, when its founders began to offer wholesale chemicals and pharmaceuticals in New York City. In the 189 years since, McKesson has grown into a powerhouse in the pharmaceutical and medical distribution industry and today generates about $266 billion in annual revenue and trades with a $47 billion market capitalization.
On May 5th, 2022, McKesson Corporation reported fiscal year and fourth quarter results for FY2022. The company ends its fiscal year at the end of March. Revenue was up 11.8% for the quarter compared to the fourth quarter of FY2021. Total revenue for the quarter was $66.1 billion compared to $59.1 billion in 4Q2021. Revenue for the quarter beats expectations by $2.28 billion. This was primarily driven by growth in the U.S. Pharmaceutical
segment, due to increased volumes of specialty products, including higher volumes from retail national account customers, and market growth, partially offset by branded to generic conversions.
For the year, revenue was up 11% versus the fiscal year 2021. The company reported revenue of $263 billion for 2022, whereas the company earned $238 billion for 2021.
On an earnings basis, the company reported Adjusted Earnings per Diluted Share of $5.83, an increase of 15% compared to the fourth quarter of 2021. This was driven by a rise of 6% in adjusted gross profit and a decrease in interest expense of 17% year-over-year, also driven by growth across the business and a lower share count. For the year, Adjusted Earnings per Diluted Share was $23.69, an increase of 38% compared to FY2021.
Source: Investor Presentation
For the full year, McKesson returned $3.8 billion of cash to shareholders, which included $3.5 billion of common stock repurchases and $277 million of dividend payments. During the fiscal year, McKesson generated cash from operations of $4.4 billion and invested $535 million in capital expenditures, resulting in Free Cash Flow (FCF) of $3.9 billion.
MCK’s growth has been excellent over the past ten years. For example, the company grew earnings from $7.20 per share in FY2013 to $23.69 per share for FY2022. This represents a Compound Annual Growth rate (CAGR) of 14%. Over the past five years, the growth rate has been even better. Over the past five years, earnings CAGR has been 17.1%.
We expect this to slow down for the company to 7% over the next five years. This is still a solid growth rate for a mature company such as MCK. This expected growth can be attained from continued revenue gains as it continues to acquire growth in bolt-on acquisitions with companies that supplement its current offerings. Also, share buyback should continue to meaningfully reduce the float over time, which we see as a critical driver of earnings-per-share growth.
We remain somewhat cautious due to an increasingly hostile regulatory environment for drug wholesalers like McKesson. In addition, constant pressure on pricing from regulators and strong generic conversion are headwinds. However, recent results have been quite supportive of long-term growth. We note that the COVID tailwind from last year and this year will potentially lessen in fiscal 2023 and beyond.
Additionally, increased utilization of high-price specialty pharmaceuticals and an aging U.S. population are tailwinds to long-term revenue growth.
The dividend has never been a priority for McKesson, and that is not likely to change anytime soon. For example, the company dividend growth rate over the past ten years has only been 8.9% compared to the earning growth of 14%.
Source: Investor Presentation
Competitive Advantages & Recession Performance
McKesson Corporation Competitive advantage is in its willingness to adapt and shift to the changing needs of its customers, its desire to buy growth, and its immense scale, which affords purchasing power. Additionally, the switching prices associated with prime seller contracts and a diploma of stickiness from an embedded relationship with its largest customers, particularly its joint project ordinary sourcing packages with Walmart and long-status distribution agreement with CVS Health’s mail-order and area of expertise in pharmacy.
The company is also very resilient during recessions. For example, during the Great Recession, the company grew earnings by 15% in 2008, and earnings increased 23% in 2009. The following year, earnings came back strong with another increase of 13% in 2010.
However, the company’s share price took a significant downturn of almost 58% during this period. This was mainly because the company was overvalued before the Great Recession.
Also, the company performed well during the COVID-19 pandemic. In FY 2021, earnings grew by 15%, and in FY2022, they grew 38%. Thus, the company performs well during challenging times in the economy.
Valuation & Expected Returns
The company looks overvalued at the current price of $330.44 per share. For example, the company has averaged a PE of 13.2x earnings over the past ten years. We expect the company to earn $23.30 per share for FY2023. At the current price, the company has a PE of 14.0x earnings.
If the company were to return to its ten-year average PE, we would see a headwind of a 6.9% price decrease. Adding the expected growth of 7% and a current dividend yield of 0.6%, we will have a total expected return over the next five years of about 1%.
McKesson offers a modest growth outlook, a robust share repurchase program, and a valuation over our fair value. We are forecasting 1% annual total returns going forward, consisting of the current 0.6% yield, 7% earnings-per-share growth, and a headwind from a contracting valuation. Thus, we would recommend investors interested in buying shares of this company to wait for a significant decrease in price before buying shares of a great company.
Other Dividend Lists
Value investing is a valuable process to combine with dividend investing. The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 45 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: