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Buying shares in the best businesses can build meaningful wealth for you and your family. And highest quality companies can see their share prices grow by huge amounts. Just think about the savvy investors who held McKesson Corporation (NYSE:MCK) shares for the last five years, while they gained 432%. If that doesn't get you thinking about long term investing, we don't know what will. On top of that, the share price is up 17% in about a quarter.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 the last half decade, McKesson became profitable. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. We can see that the McKesson share price is up 118% in the last three years. In the same period, EPS is up 35% per year. That makes the EPS growth rather close to the annualized share price gain of 30% over the same period. So you could reasonably conclude that investor sentiment towards the stock has remained pretty steady, over time. There's a strong correlation between the share price and EPS.
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?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for McKesson the TSR over the last 5 years was 451%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.