The dividend aristocrats, a group of high quality companies, has rewarded shareholders with safe and reliable income for many years. However, sometimes, a company falls out from the list due to increased competition or weaker business models. In this article, we shall take a look at Cardinal Health, the medical supplier and try to figure out Cardinal is set to rebound or if investors should put their hard-earned money elsewhere.
Classic Fundamentals Looks Good
Surely, one could argue that now is the time to buy Cardinal Health (NYSE: CAH). The company has paid uninterrupted dividend for more than 25 years. The yield is currently at 3.57% which is 68% above its 5-year average at 2.13%. The payout ratio, which says something about how much of the company uses to cover the dividend is somewhat low at 36%. Historically, Cardinal Health’s payout ratio has been around 28 to 30 %, and the forward is set to be 39% which still means that the company should have no problem covering the dividend.
Cardinal Health has produced positive free cash flow for each of the last 10 years and last year, the dividend increased by 12%. For the last 5 years, the CAGR has been 15% per year and for the last 20 years, astonish in 21% per year.
The P/E ratio
While the price to earnings ratio is currently at 21.56 and average P/E during the last 10 years has been 15.6, the forward P/E ratio tells us another story. Cardinal Health’s forward P/E ratio is very low at 10.2. To compare, S&P500 trades at a P/E at 16.2 and offers half the dividend yield.
So, what’s the problem with Cardinal Health?
First, one should stress the consequent events of falling revenue quarter after quarter. Last quarter, earnings fell another 9.2%. If this continue, Cardinal Health will have less and less money to pay their obligation which isn’t that comforting given a quick ratio at 0.50 and debt to capital at 53%.
What has happened is that during the past 5 years, Cardinal Health benefited when lots of drugs lost their patent in 2012. Now, margins are getting squeezed. Gross margin is 5.30% and operating margin is very low at 1.20% along with profit margin at 1.30%. Those margins are very low and leaves little room for missteps.
Then, we have the increased competition from the joint investment group between Buffet, Bezos and Jamie Dimon which we wrote about here.
“They say that healthcare prices and pharmaceutical prices are way too high, and that they share a common goal about helping fellow Americans”
Summarizing the Investment Case
When summarizing the pros and cons, one could say it’s quite clear that Cardinal Health’s future looks unsure.
Valuation metrics say it’s a great value play and one might say that all of the pessimism is already build into the stock price. If that’s the case, investors should expect great capital appreciation along with hefty dividend payments.
On the other side, one could argue that Cardinal Health’s financial status along with it’s core business is going to meet increased competition and who wants to fight Berkshire Hathaway and Amazon anyway?
Author does not have investment in stock discussed in this article. Sign-up for our newsletter so you don’t miss any hot investment opportunities. Also download our recently published Best Blockchain Stock To Invest In Right Now or Volatility Survival Guide report absolutely free.