McKesson Stock Is Shrinking, And That’s The Point

While the market debates the future of drug pricing, this healthcare giant is steadily handing a larger piece of the business back to its owners.

Over the last three years, McKesson (MCK)’s earnings per share have grown 17.8% a year, far outpacing the 12.9% annual growth of its underlying net income. That gap isn’t an accounting trick. It’s the direct result of a company systematically buying back its own stock, making your ownership stake grow without you lifting a finger.

The stock itself has pulled back recently, currently trading about 19% below its 52-week high. Investors are weighing the company’s strong execution against real questions about the future. On its latest earnings call, analysts pressed management on slowing revenue growth in its Prescription Technology Solutions segment and the long-term impact of biosimilars. As one analyst framed the concern, “more than 1/3 of the oncology market that’s clearly going to be impacted by either the IRA or a biosimilar transition.”

Where Does a 1.6% Margin Business Get This Cash?

It’s a fair question, given the company’s razor-thin operating margin of 1.6%. The answer lies in a notably powerful cash-flow engine. McKesson operates with a negative cash conversion cycle, meaning it collects cash from customers before it has to pay its suppliers. It carries about $60 billion in accounts payable, an interest-free loan from its partners that covers its inventory about 2.5 times over. This is why its operating cash flow is about 1.3 times its net income, funding a total shareholder yield of 4.8%. Over the last year alone, the company spent about $4.8 billion on repurchases and paid $381 million in dividends.

Is This Payout Resilient to Pricing Pressure?

That capital return is happening while the market debates those long-term pressures. The company’s balance sheet looks solid, with low leverage (net debt is 0.6 times EBITDA) and an interest coverage ratio of 26.1 times, meaning debt service is a minor expense. This year’s free cash flow covers about 1.1 times the cash paid out in buybacks and dividends, so the program is self-funding for now. The durability of this model, however, depends on maintaining that supplier float and managing inventory effectively.

What’s the Catch for an Investor Today?

Of course, a shrinking share count is only one part of the return equation, alongside earnings growth and the valuation multiple the market is willing to pay. The stock’s trailing price-to-earnings ratio is 22.2, which isn’t cheap. The steady, shareholder-focused capital return must therefore provide a strong tailwind to offset the market’s concerns about drug pricing and segment growth. Going forward, the critical indicator will be the stability of the supplier float that funds these shareholder returns.

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.