Cardinal Health (CAH) is one of 3 large pharmaceutical distributors in the United States that together account for more than 90% of the pharmaceutical distribution market share, explains Ben Reynolds, income expert and editor of Sure Dividend.
What makes Cardinal Health stand apart from its competitors AmerisourceBergen (ABC) and McKesson (MCK) is its extraordinary dividend history. Cardinal Health is a Dividend Aristocrat — an S&P 500 stock with 25+ years of rising dividends — thanks to its 32 consecutive years of dividend increases.
While Cardinal Health has a long history of growth as shown by its excellent dividend history, the company has struggled in recent years along with the entire pharmaceutical distribution industry. Cardinal Health generated earnings-per-share of $5.24 in fiscal 2016, versus $5.00 in fiscal 2018. The company expects earnings-per-share to barely grow in fiscal 2019.
Weakness in the pharmaceutical industry is a result largely of declining margins. Margins are declining due to several reasons:
• Pricing pressure from competitors
• Social and political pressure from distributor’s role in the opioid epidemic
• Hints that Amazon (AMZN) could enter the industry
All of these factors have weighed on margins and the stock prices of pharmaceutical distributors. But with pessimism comes low valuations — and opportunity.
Cardinal Health appears deeply undervalued. The company’s stock price reached a high of over $90 back in 2015. It traded under $50 in December of 2018, while earnings-per-share are 14% higher in fiscal 2018 versus fiscal 2015.
Cardinal Health’s management has taken advantage of low share prices by engaging in significant share repurchases. The company reduced its share count by 2.5% in fiscal 2018. And the rate of share repurchases has increased since.
We don’t expect Cardinal Health to return to the double-digit earnings-per-share growth rates that it has generated in the past. But we do expect earnings-per-share growth to stabilize after fiscal 2019 and return to growth of around 5% annually driven by a combination of share repurchases and organic growth.
This growth combined with the company’s high dividend yield of around 4% gives investors expected total returns of approximately 9% annually at Cardinal Health before valuation multiple gains.
With Cardinal Health being deeply undervalued, we expect significantly higher returns for shareholders when the current negative environment for pharmaceutical distributors improves. In the meantime, investors will benefit from Cardinal Health’s high dividend and share repurchases.
