Company Description: Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CAH is trading at a premium to all four valuations above. The stock is trading at a 74.2% premium to its calculated fair value of $45.51. CAH did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CAH earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 18 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $411 is below the $1,700 target I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 9.6% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 2.98%.
Memberships and Peers: CAH is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: AmerisourceBergen Corporation (ABC) with a 1.3% yield, McKesson Corporation (MCK) with a 0.5% yield and Owens & Minor Inc. (OMI) with a 2.9% yield.
Conclusion: CAH did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks CAH as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $47.20 before CAH's NPV MMA Differential increased to the $1,700 minimum that I look for in a stock with 18 years of consecutive dividend increases. At that price the stock would yield 2.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,700 NPV MMA Differential, the calculated rate is 14.3%. This dividend growth rate is higher than the 9.3% used in this analysis, thus providing no margin of safety. CAH has a risk rating of 1.75 which classifies it as a Medium risk stock.
CAH offers a diversified line of products and services and is well situated as one of three major players in the U.S. drug distribution industry, with about a third of the available market. Intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. The company should enjoy good growth prospects in its contract drug-making and drug dispensing systems.
Despite a 2% decline in sales reported in late October for first-quarter fiscal 2015, CAH is well-positioned for future growth. The company’s strategy of bolt-on acquisitions is providing positive results as the AssuraMed acquisition is bolstering the Medical segment, Yong Yu helped its footprint in China, and the acquisitions of Innovative Therapies and Emerge Medical in the quarter which are expected to be accretive going forward.
The company generates strong cash flows, which provides flexibility for expansion, dividends and share buybacks. CAH is currently trading above my calculated fair value price of $45.51. Its dividend yield is well below my current minimum which will keep me from giving CAH serious consideration at this time.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in CAH (0.0% of my Dividend Growth Portfolio) and was long OMI. See a list of all my dividend growth holdings here.
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Tags: CAH, ABC, MCK, OMI,
