McKesson Stock Is Shrinking, And That’s The Point for Owners
While the market debates growth, this healthcare giant is steadily retiring its own shares, a strategy that has quietly compounded value for investors.
Over the past three years, McKesson (MCK)’s net income has grown at a healthy 12.9% annual clip. But if you owned the stock, your claim on those profits, measured by earnings per share, grew much faster: 17.8% a year. That gap isn’t an accounting trick. It’s the result of a deliberate, powerful, and often under-appreciated strategy.
McKesson is a capital-return compounder. By consistently buying back its own stock, it shrinks the number of shares outstanding, meaning each remaining share represents a larger piece of the company. Your ownership stake grows even when you do nothing.
That engine is worth a closer look right now, especially as the stock trades about 18% below its 52-week high. The market has its worries. On the company’s latest earnings call, analysts questioned slowing revenue growth guidance in its Prescription Technology Solutions segment and probed how a coming wave of lower-priced biosimilars might affect margins in the critical oncology business. These are valid concerns about the future pace of the business.
What is the counterweight to those worries?
It’s the sheer scale of the capital return. In the last twelve months, McKesson spent about $4.8 billion on share repurchases and paid another $381 million in dividends. This adds up to a total shareholder yield of 4.8% of the company’s market value. The direct result is a steadily shrinking share count, which has fallen by an average of 3.7% a year for the last three years. This is the mechanism that has allowed EPS to outrun net income growth, a dynamic that has historically rewarded long-term holders.
How can a business with thin margins fund this?
This is the surprising part of McKesson’s model. The company’s operating margin is just 1.6%, which doesn’t scream “cash gusher.” But the business runs on a negative cash conversion cycle. It carries about $60 billion in accounts payable, essentially an interest-free loan from its suppliers. That float is so large it covers the company’s inventory about 2.5 times over, meaning McKesson collects cash from its customers long before it has to pay its own bills. This is why its operating cash flow is about 1.3 times its reported net income, giving it more than enough firepower to fund its returns.
Is the compounding built to last?
For now, the foundation looks solid. The company’s free cash flow covers about 1.1 times the cash it pays out in buybacks and dividends. Its balance sheet is conservative, with net debt at a low 0.6 times EBITDA and an interest coverage ratio of 26.1 times. The capital return isn’t a guarantee of stock performance; earnings growth and the market’s valuation multiple are just as important. But for investors weighing the current debate, the question is whether this persistent, cash-backed program to increase your ownership stake offers a compelling reason to look past the headlines. The key metric to watch isn’t just profit growth, but whether that powerful supplier float remains intact.
Is McKesson the only stock quietly doing this, or are there others worth a look? Our Capital Compounders screen ranks the companies retiring the most stock and compounding earnings per share fastest for their owners, so you can see exactly where this one stacks up. And if it is exposure to healthcare as a whole you want rather than this one name, a healthcare ETF like XLV covers that single sector. Going broader than any one sector, to a quality-first mix across the whole market, is where the portfolio below comes in.
Great Compounders Become Great Concentrations
The best compounders have a way of quietly becoming most of your portfolio – which is wonderful until the one year they stumble. A position that large turns a bad stretch into real damage, and trimming it hands a chunk to the IRS. There is a way to keep the upside, cap the downside, and diversify without the tax hit.