Warren Buffett has a knack for picking winners to invest in with his company Berkshire Hathaway (BRK.A -0.62%) (BRK.B -0.78%). With plenty of patience and the Oracle of Omaha’s time-tested value investing strategy, he buys businesses that others would eschew and then waits for them to blossom into multi-baggers as years pass. Usually, Buffett stocks don’t skyrocket in the course of a year — but there’s a recent exception to that rule which might be worth considering.
McKesson (MCK 0.60%) makes up a mere 0.25% of Buffett’s portfolio, accounting for “just” $894.5 million in value, but it’s one of the world’s most influential medical distribution businesses. What’s more, its shares are up by more than 44% this year, smashing the market’s loss of 11%. Is now a good time to follow Buffett into making an investment?
If it can flourish in 2022, it can flourish in practically any conditions
The first thing to know about McKesson is that it has a few canonical Buffett stock attributes, starting with its relatively stable growth over time. In the last 10 years, its trailing 12-month revenue climbed by 119% with a steady and largely uninterrupted pace to top an almost unimaginably large sum of $268.4 billion. To accomplish that, it distributed medicines, hospital and clinical supplies of all types, practice management software, and a smorgasbord of other types of products that healthcare companies might need to provide care.
Importantly, it doesn’t design any of those items itself, and it claimed zero in research and development expenses (R&D) in 2021 and its fiscal 2022. That helps to keep its costs low — a plus for Buffett — which is key, because its profit margin is already quite thin at near 0.5%. The business operates with wholesaling in mind. Per its fiscal 2023 first-quarter earnings report, management isn’t discussing inflation and supply chain as any kind of threat. So if it’s not having any trouble in today’s wild economic environment, it’s reasonable to expect it to weather future downturns with similar grace.
On that note, investors probably shouldn’t expect McKesson to change much over the coming years, and that’s another plus for Buffett. It’ll keep using its cash flow to finance share buybacks, and further increases to its dividend are highly likely. But, at the moment, its forward dividend yield is 0.6%, so it isn’t exactly a great choice for dividend investors.
Be ready to hold your shares for a Buffett-esque period
In case it wasn’t obvious, medical supplies aren’t exactly a hot growth area, nor is distributing pharmaceuticals or any other segment that McKesson handles. While population growth does lead to more demand for its products by increasing the overall level of demand for healthcare, it isn’t a fast process.
Likewise, if you want to take advantage of its share buybacks and its dividend hikes, which increased the size of its payout by 170% over the last 10 years, you’ll need to be patient, just like Buffett.
Make no mistake: This isn’t the right stock for investors who are interested in beating the market in the short term, nor is it the right stock for anyone who might need their funds within a decade. It isn’t a growth stock; it’s a blue-chip that’s destined to be around in the distant future in more or less the same state as it is today, just bigger. But, for investors with a conservative approach or a minimal tolerance for risk, McKesson could be a great fit.
Its vast and often somewhat mundane offerings are always going to be needed by huge numbers of healthcare customers, regardless of how the economy is doing or the latest and greatest developments in medical technology. And if Warren Buffett thinks it’s worth owning, you can bet that it’ll most likely pay off in the long run.