McKesson (MCK -1.35%) is one of the largest pharmaceutical distributors in the country. While this isn't the type of investment you might expect 10x returns from, it can provide stability and even reliable dividend income. And there can be significant value in safety and stability. You might be surprised at how well you would have fared going with this relatively safe option five years ago, and how soundly it has beaten the S&P 500.
Where the stock was in 2018
On the first day of trading in 2018, shares of McKesson closed at $159. If you were to invest $20,000 into the business at that point, that would have enabled you to acquire approximately 126 shares of the healthcare company. Today, with the stock price around $400, that investment would be worth approximately $50,000, for a return of 150%.
McKesson also pays a modest dividend yield of 0.5%. When you add in the dividend and assume you reinvested that into the business, then your total returns since 2018 would be around 167%. By comparison, the S&P 500's total returns over the same stretch are much more modest at 72%. A $20,000 investment in the healthcare stock after factoring in dividends would be worth over $53,000 today versus about $34,000 if you went the safer route and invested in the index.
Why the stock has performed well
A big reason McKesson has made for a good investment over the years is that the company has a steady, growing business that continues to get bigger.
In its most recent fiscal year, for the period ended March 2023, revenue totaling $276.7 billion was up 5% from the previous year. Although the company's margins are slim at around 1%, that's still enough for the business to net $3.6 billion in earnings. As long as demand for pharmaceuticals goes up, so too will the need for the services of a top distributor such as McKesson, allowing the business to grow along with the healthcare industry.
MCK Revenue (Annual) data by YCharts
And a big risk hovering over the company is effectively gone with McKesson and other distributors reaching a settlement on opioid litigation last year. Even though it will cost the company $7.4 billion, that will be spread out over 18 years, which will ensure that it doesn't cripple its operations. This settlement played a big role in the stock's ascent since then.
Is McKesson a good buy today?
McKesson's stock currently trades at a price-to-earnings multiple of 18, which is in line with the S&P 500 average. Although it's not a dirt-cheap buy, it's not an expensive stock to own, either.
Ultimately, there isn't a big compelling reason to buy the stock today. Its valuation is modest; so too are its margins, its dividend yield, and even its level of growth. There's nothing about the business that would motivate me to buy it, not when there are other beaten-down growth stocks out there that could possess much more upside.
But if you're a risk-averse investor, there is value in owning shares of McKesson as this can be a relatively safe stock to own, especially at a time when the markets are a bit unstable with inflation and fears of a recession weighing on many stocks. McKesson has been a bit of a safe haven stock of late, rising 23% in value over the past 12 months while the S&P has produced more modest gains of around 7%.
It's not a slam-dunk buy, but McKesson can make for a quality stock to hang on to, one that can add some stability to your portfolio.
