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McKesson (NYSE:MCK) stock performs better than its underlying earnings growth over last three years

The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But if you buy shares in a really great company, you can more than double your money. To wit, the McKesson Corporation (NYSE:MCK) share price has flown 151% in the last three years. Most would be happy with that. On top of that, the share price is up 13% in about a quarter. But this move may well have been assisted by the reasonably buoyant market (up 7.2% in 90 days). Since the stock has added US$2.7b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns. While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time. During three years of share price growth, McKesson moved from a loss to profitability. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers). It is of course excellent to see how McKesson has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time. What About Dividends? When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of McKesson, it has a TSR of 159% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments! A Different Perspective It's good to see that McKesson has rewarded shareholders with a total shareholder return of 85% in the last twelve months. And that does include the dividend. That gain is better than the annual TSR over five years, which is 21%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. It's always interesting to track share price performance over the longer term. But to understand McKesson better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with McKesson , and understanding them should be part of your investment process. Of course McKesson may not be the best stock to buy. So you may wish to see this free collection of growth stocks. Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. The board of Stanley Black & Decker, Inc. (NYSE:SWK) has announced that it will be paying its dividend of $0.80 on the 20th of September, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 3.3%, providing a nice boost to shareholder returns. Stanley Black & Decker's Payment Has Solid Earnings Coverage If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Stanley Black & Decker was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend. Over the next year, EPS is forecast to expand by 94.9%. If the dividend continues on this path, the payout ratio could be 27% by next year, which we think can be pretty sustainable going forward. Stanley Black & Decker Has A Solid Track Record The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the annual payment back then was $1.64, compared to the most recent full-year payment of $3.20. This works out to be a compound annual growth rate (CAGR) of approximately 6.9% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained. The Dividend's Growth Prospects Are Limited Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. Stanley Black & Decker has seen earnings per share falling at 4.3% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited. In Summary Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Stanley Black & Decker is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment. Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for Stanley Black & Decker (of which 1 is potentially serious!) you should know about. Is Stanley Black & Decker not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. 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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