Is this Buffett-backed Blue Chip stock a buy?

Warren Buffett is one of the most successful investors of all time. Therefore, when its holding company Berkshire Hathaway is added to a stock holding, it is often because of good reasoning.

In the second quarter, the company strengthened its position in the distributor of pharmaceutical and medical supplies McKesson (NYSE:MCK). Berkshire Hathaway added 276,369 shares to its position in the company, bringing its total position to nearly 3.2 million shares.

Should you add McKesson to your portfolio? Let’s look at company fundamentals and valuation to answer this question.

An economic model that is the cornerstone of healthcare

The launch and production of drugs, vaccines and medical supplies are essential for the health sector. But these goods are worthless if they do not reach hospitals, pharmacies and patients when needed. McKesson has played a central role in the distribution of COVID-19 pharmaceuticals and vaccines throughout the pandemic, as it gets these products from point A (manufacturers) to point B (hospitals and pharmacies).

The company posted revenue of $67.2 billion in its first quarter for the period ending June 30. This was 7.1% more than the turnover of the prior year period. What was behind the large cap solid business growth for the quarter ?

McKesson’s revenue growth was primarily driven by its predominant pharmaceutical segment, which handles prescription drugs, COVID-19 vaccines and other products. Growing overall demand for prescription drugs and specialty products contributed to a 13.9% year-over-year increase in segment revenue to $56.9 billion in the quarter.

McKesson generated $5.83 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which was up 4.9% year-over-year. The company’s razor-thin net margin contracted 13 basis points to 1.3% for the quarter, primarily due to a much higher effective tax rate for the period. However, this was more than offset by a 7.7% drop in McKesson’s weighted average diluted share count, resulting from share buybacks.

As the world’s population ages, people are more likely to be diagnosed with chronic diseases, and the demand for McKesson’s services will only increase. That’s why analysts estimate that the company’s adjusted EPS will grow 9.5% annually over the next five years.

Warren Buffett. Image source: Getty Images.

The dividend has a potential for rapid growth

McKesson’s 0.6% dividend yield will not be attractive to income investors, given that the S&P500 the index yields 1.7%. But the healthcare company is offering more than enough dividend growth to offset the minimal starting income it provides to new shareholders.

McKesson’s dividend payout ratio will come in at around 8% in its current fiscal year. (Yes, you read that right.) This will give the company the flexibility to make stock acquisitions and buybacks while pursuing double-digit dividend hikes as it has done for the past two years. .

A great company at a fair price

McKesson is a fundamentally sound company. This was demonstrated by the stock’s impressive performance – up 77% in the past year alone. Still, McKesson still doesn’t seem unreasonably valued.

The stock trades at a forward price-to-earnings (P/E) ratio of 13.6, which is only slightly higher than the medical distribution industry’s forward P/E ratio of 12.6. . For the most dominant medical distribution company in the industry, this valuation is hardly excessive for investors growing the dividends to pay to buy the company.

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Kody Kester has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends McKesson and recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short put options in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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