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Dividend Aristocrats In Focus: Cardinal Health, Inc.


Updated on February 29th, 2024

When it comes to dividend growth stocks, not many stocks can surpass the Dividend Aristocrats. The Dividend Aristocrats are a group of 68 stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases. These companies have managed to increase their dividends every year without exception, even during recessions.

The Dividend Aristocrats have a proven ability to raise their dividends even during economic downturns. We have created a full list of all 68 Dividend Aristocrats, along with important metrics such as price-to-earnings ratios and dividend yields.

You can download an Excel spreadsheet with the full list of Dividend Aristocrats by clicking on the link below:

 

Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.

In this article we are going to look more deeply at healthcare distributor Cardinal Health (CAH).

With 36 consecutive years of dividend increases, the company has clearly proven to be a reliable dividend growth stock, which speaks to the resilience of Cardinal Health’s business model.

Business Overview

Cardinal Health, founded in 1971, is one of the “Big 3” drug distribution companies along with McKesson (MKC) and AmerisourceBergen (ABC). Cardinal Health serves over 24,000 United States pharmacies and more than 85% of the country’s hospitals.

The company has two operating segments: Pharmaceutical and Medical. The Pharmaceutical segment is by far the company’s largest, as it represents nearly 90% of total revenue. The pharmaceutical segment distributes branded and generic drugs and consumer products. It distributes these products to hospitals and other healthcare providers.

Meanwhile, the medical segment distributes medical, surgical, and laboratory products to hospitals, surgery centers, clinical laboratories, and other service centers.

On February 1st, 2024, Cardinal Health released results for the second quarter of fiscal year 2024 for the period ending December 31st, 2023. For the quarter, revenue grew 12% to $57.4 billion.

On an adjusted basis, the company’s posted earnings of $562 million, or $1.82 per share, compared favorably to earnings of $467 million, or $1.32 per share, in the prior year. Revenue results were $490 million ahead of estimates while adjusted earnings-per-share were $0.22 better than expected.

Source: Investor Presentation

For the quarter, Pharmaceutical sales of $53.5 billion and segment profit of $518 million both represented growth of 12% from the prior year. This segment once again benefited from higher sales to existing customers and strength in brand and specialty pharmaceuticals.

Revenue for the Medical segment of $3.9 billion was a 3% improvement year over-year while segment profit of $71 million compared very favorably to $17 million last year. This segment benefited from high demand in at-home solutions and distribution.

Growth Prospects

Cardinal Health provided updated guidance for fiscal year 2024 as well, with the company now expecting adjusted earnings-per-share in a range of $7.20 to $7.35 for the fiscal year, up from $6.75 to $7.00 and $6.50 to $6.75 previously.

At the midpoint, this would be a 25.7% improvement from the prior year.

Source: Investor Presentation

Cardinal Health has grown earnings-per-share by an average compound rate of 4.7% and 6.6% over the last 10- and five-year periods of time, respectively. Since fiscal 2014, the dividend has grown at 5.2% annually, but this has slowed to 0.9% for the last five years. Moving forward we do anticipate slightly lower growth rates.

We are forecasting 3% intermediate-term earnings growth, from management’s guidance. Our subdued growth rate view could turn out to be conservative, especially with the company’s penchant for share repurchases.

Competitive Advantages & Recession Performance

The biggest competitive advantage for Cardinal Health is its distribution capability, which makes it very difficult for competitors to successfully enter the market.

Cardinal Health distributes its products to roughly 90% of U.S. hospitals. It serves more than 29,000 U.S. pharmacies, as well as over 10,000 specialty physician offices and clinics. It also manufactures and distributes more than 50,000 types of Cardinal Health medical products and procedure kits. The company’s home healthcare business serves over 3.4 million patients, with more than 46,000 products.

In addition, Cardinal Health operates in a stable industry with high demand. The company should remain steadily profitable, as there will always be a need for pharmaceutical products to be distributed.

Here’s a look at Cardinal Health’s earnings-per-share during the Great Recession:

While part of this is recession-related, keep in mind that Cardinal Health’s financial results were materially impacted by its spinoff of CareFusion Corporation, which was completed in 2009. Despite this spinoff, the company’s segment revenues, segment earnings, and dividends continued to grow during this time.

Since people will always need their medications and healthcare products, regardless of the economic climate, Cardinal Health could be considered more recession-resistant than the average company.

Valuation & Expected Returns

Based on anticipated adjusted earnings-per-share of $7.28 for fiscal 2024, and a share price of ~$110, Cardinal Health is currently trading at a P/E ratio of 15.1.

The stock has traded hands with an average P/E ratio of 13.6 times earnings dating back to 2014. However, this was during a time when growth was much more robust. We have used a multiple of 10 times earnings as a starting place for fair value in recognition of our lower anticipated growth rate.

A declining P/E multiple could reduce annual returns by 7.9% per year over the next five years.

In addition to changes in the valuation multiple, future returns will be generated from earnings growth and dividends. We expect Cardinal Health to grow earnings-per-share by 3% per year, primarily from revenue growth and share repurchases.

Finally, the stock has a current dividend yield of 1.8%. While the pace of dividend growth has slowed, the starting yield is reasonable for a company with such a strong track record.

As a Dividend Aristocrat, Cardinal Health is likely to continue raising its dividend each year. Moreover, the dividend appears secure, with a projected dividend payout ratio of approximately 27% for fiscal 2024.

Putting all the pieces together – average growth and dividend yield offset by a meaningful valuation headwind – our expected total return for Cardinal Health is -3.1% per year over the next five years. The negative expected rate of return qualifies Cardinal Health stock as a sell right now.

Final Thoughts

Cardinal Health is a Dividend Aristocrat that has increased its dividend for over 35 years. The company continues to grow revenue. And, the company has put in place a number of initiatives that should return it to positive earnings-per-share growth going forward.

High-quality companies like Cardinal Health have withstood difficult periods before and will do so again. The history of the company, its dividend history, and its current yield of 1.8% makes the stock an interesting choice for income investors. Total expected returns remain very low, however, making the stock a sell at the moment.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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