Cardinal Health, It Pays To Be The Middleman (CAH)

Growing, Growing, Growing

I highlighted Cardinal Health (CAH) as a Dividend Aristocrat that you might want to own in November of 2019. At the time, the company was expecting a 5% CAGR over the next 5 or so years with an outlook supported by demographic and market trends. Since then, the company has performed better than expected in terms of its business and yet the stock price is lagging the broad market recovery. Or was lagging, I should say, today’s news is helping to correct that issue.

Cardinal Health is a middleman in the healthcare market. As a distributor of pharmaceuticals and medical devices, it’s business is part of the infrastructure of American healthcare and shares the benefits of other infrastructure-related businesses. The business itself is government regulated so there is little fear of disruption other than from the political sphere; there are high barriers to entry so little fear of competition; revenue is steady and stable and the profits are predictable. All factors that add up to safe dividends and, in this case, growing dividends.

The Q3 Results Are Strong And The Outlook Is … Stable

The fiscal third-quarter results are strong and point to solid results for the year. Revenue grew 11.2% over the previous year and beat consensus by 500 basis points. Both adjusted and GAAP earnings beat as well, GAAP by $10.12 and Adj by $0.17, with GAAP earnings up 20% over the previous year. Strength was seen in both segments, Pharmaceutical and Medical, with Medical leading at +15% YoY.

The caveat is that management has offered updated guidance for the year. Management sees the COVID-19 virus pandemic having a net-negative impact to results in the current quarter, calendar 2nd/fiscal 4th quarter 2020, but reaffirmed the full-year results.

“While both segments experienced a modest net positive impact in the third quarter from increased volume related to the COVID-19 pandemic, the company expects a significant net negative impact to fourth-quarter financial results in both segments. This is driven most meaningfully by a decrease in volume related to the cancellation or deferral of elective medical procedures … The company reaffirms its fiscal year 2020 guidance range for non-GAAP diluted earnings per share attributable to Cardinal Health, Inc. of $5.20 to $5.40.”

Assuming the company is growing at the projected 5% CAGR and the 3rd quarter strength (calendar 1st 2020) was due to stock-piling/pandemic-prep, 4th quarter results could come in flat to the previous year and not negatively impact the outlook. Because the economy has begun to reopen with more than half the quarter to go, I think Cardinal could see better revenue than even they expect.

The Dividend Is As Safe As Ever

Cardinal Health is a great dividend payer an on track for Dividend Aristocrat status. The company just announced its 16th consecutive dividend increase and it is on track to increase again next year. The good news is that, even with today’s 5% pop in prices, the stock is paying a nice 3.70%. The bad news, if you want to call it that, is the new increase is only worth 1% of the payout. Not a lot but enough for now.

Looking forward, the outlook for future increases is still good. The payout ratio is low and below 40% leaving ample free-cash to service the debt. There is quite a bit of debt but it is mostly long-term in nature and well-managed. The company has loads of cash on hand and the debt-to-free-cash-flow ratio is running at a cool 4X.

The Technical Outlook: Bullish With A Chance Of Ranging

The technical outlook for Cardinal Health is bullish but there is a caveat. Although price action is moving and indicated higher, there is resistance at the top of a possible trading range to worry about. Resistance is near the $57 level which represents about an 8% rise from today’s price action. If resistance at $57 can be overcome a move to $60 and possibly higher is the next likely scenario.