McKesson (MCK -0.49%) is a stalwart in the healthcare industry with a history that goes back nearly 200 years. It's the type of rock you might want to be leaning on in your portfolio amid such challenging macroeconomic conditions.
Its role in distributing pharmaceuticals and medical supplies to hospitals and pharmacies makes it a pivotal part of the healthcare industry. And with the U.S. population getting older and seniors making up a bigger part of it, healthcare spending is only likely to rise in the future.
Is McKesson a stock that you should consider adding to your portfolio today?
What investors will like about McKesson
McKesson is a leading healthcare distribution company and so its business is normally stable. The Texas-based business has vast operations, with 49,000 employees and customers in 14 countries. And that has resulted in some fairly stable revenue growth over the years.
MCK Revenue (Quarterly) data by YCharts
That consistency and predictability can make this is an attractive stock to invest in, because there aren't any big surprises in its operations. In addition, the healthcare company also generates tons of free cash flow. Over the past four quarters, McKesson has accumulated $4.2 billion in free cash. Its strong cash flow enables the company to pay a dividend and reinvest in its operations (or pursue acquisitions) so that it can continue growing.
What investors won't like
What doesn't look great about the business are its profit margins as they typically are less than 2% of revenue. That means there isn't a big buffer if the company incurs a large expense, such as in 2021 when it was hit with an $8.1 billion charge related to opioid litigation, sending its bottom line into the red.
MCK Profit Margin (Quarterly) data by YCharts
But when it comes to large companies like McKesson that generate north of $250 billion in revenue on an annual basis, low margins can suffice given the volume that flows through the business. Over the trailing 12 months, McKesson has generated $273.9 billion in sales and although its paltry 1% margin isn't high, that has still translated into $3.1 billion worth of profit.
What might also be disappointing for investors is that despite the billions in profits and the strong cash flow it generates, the company doesn't offer more than a modest dividend yield of 0.6% -- the S&P 500 average, by comparison, is 1.7%.
Is the stock a buy?
McKesson's stock trades at 17 times earnings, which is cheaper than the average healthcare stock, which sports a ratio of 21. Over the past five years, the stock has generated some strong total returns (which include dividends) of 142%, which is far higher than the S&P 500's returns of 58% over the same time frame.
The stock could be a good option for risk-averse investors looking for exposure to the healthcare industry. But if you're craving a bit more growth potential, you may want to consider these other healthcare stocks instead.
