McKesson (MCK 0.48%), a leading distributor of pharmaceutical and medical supplies, is a favorite of institutional investors. That includes Warren Buffett's Berkshire Hathaway, which 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 added 276,000 more in the second quarter. It didn't buy any additional shares of McKesson in the third quarter, but held its position.

The stock is up more than 48% so far this year and there are plenty of reasons why Buffett may like it, including strong top- and bottom-line results. The company has increased annual revenue by 116% over the past 10 years and boosted its annual earnings per share (EPS) by 29% in that same period.

Rewarding shareholders

The stock is also a dependable source of passive income. The company has raised its dividend for 15 consecutive years and grown the quarterly payout by 170% over the past decade.

McKesson raised its quarterly dividend by 15% this year to $0.54 per share, giving it a yield of just under 0.6%. That is below the average of the S&P 500 (1.82%), but with a cash dividend payout ratio of only 7.14%, it is overwhelmingly safe and has plenty of room to grow. McKesson did $1.5 billion in share buybacks in the recent quarter, with another $5.8 billion authorized for the rest of the fiscal year. That's good news for shareholders because buybacks reduce the number of shares, boosting earnings per share.

McKesson announced quarterly results on Nov. 1, reporting revenue of $70.2 billion, up 5% year over year, and EPS of $6.46, up 278% compared to the same period a year ago. The company also increased its fiscal-year forecast for adjusted EPS to $24.45 to $24.95, up from the previous estimate of between $23.95 and $24.65. 

MCK Revenue (Annual) Chart

MCK Revenue (Annual) data by YCharts

Streamlining its business

McKesson attributed the revenue growth to a rise in its U.S. pharmaceutical segment, which saw revenue climb 12% over the same period last year, as the company said it had more sales of specialty products and its retail customers increased volume on their orders. Its prescription technology solutions segment reported revenue of $1 billion, up 9% year over year, due to increased technology service revenues and prescription sales increases in the company's third-party logistics business.

Revenue fell by 25% from its international segment, down to $6.9 billion. That's due to the company's decision to streamline its overseas business. It has already divested itself in 11 of the 12 European nations it does business in, selling to the Phoenix Group. The only country it's still in the process of divesting its European business with is Norway.

The company said it sees 12% to 15% revenue growth this fiscal year for its U.S. pharmaceutical segment and 10% to 16% revenue growth for the prescription technology solutions segment. Its guidance forecasts a 4% to 8% decline in the fiscal year for its medical solutions segment, and, thanks to its European divestitures, a decline of 42% to 46% in the international segment.

The hunt for more revenue

McKesson made some big moves in the most recent quarter that could help it increase revenue in the long term. On Nov. 1, it closed its deal to buy RxSavings Solutions, which strives to bring transparency to prescription prices, for potentially as much as $875 million.

RxSavings Solutions is a 10-year-old Kansas City area start-up that employs software to help consumers and employers' health plans save money on prescription drug costs. It has 17 million members and had revenue of roughly $40 million in 2021. The thought is that McKesson's resources will help RxSavings grow its membership, and the company should fit well into McKesson's prescription technology solutions segment.

McKesson also extended its partnership to distribute pharmaceuticals to CVS Health through 2027. CVS is McKesson's largest customer as the company provides drugs to CVS Health's Caremark mail 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 healthcare company has also been focusing more on its oncology offerings. It's expected to close on a joint venture with the Sarah Cannon Research Institute of HCA Healthcare to sponsor oncology clinical research and speed up drug development. As part of that partnership, McKesson bought Genospace, which uses genomics to do precision medicine, particularly in oncology, and works on improving 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 lots of investors are interested in the company. Buffett likes investing in stable companies and McKesson has offered a reasonable price. Even with its shares on the rise, McKesson trades for only 25 times earnings. It's a solid company with plenty of growth potential. It been rewarding investors with stock buybacks and with consistent dividend increases.

While there continue to be concerns about how a possible recession could hit the market, if you hold McKesson stock, that's less of a worry as its diversity of revenue streams protects it against a market downturn. And it deals in prescription medicines, which people need to take whether the economy is good or bad.