In part 20 of my 54-part Dividend Aristocrats In Focus series, I take a closer look at Cardinal Wellness (NYSE: CAH). Cardinal Wellness is a leading pharmaceutical consolidator and distributor. It also produces and disperses basic medical materials like gloves, gowns, and drapes. The company was started in Columbus Ohio in 1971. Since then, Cardinal Wellness has actually turned into a $25 billion clinical distribution powerhouse. The companys success is revealedreceived its 30-year streak of consecutive dividend increases. The infographic below amountssummarize the effect Cardinal Health has on health care.
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Source: Cardinal Wellness 2014 Yearly Guide
Cardinal Health runs in two segments: pharmaceutical and clinical. The pharmaceutical section consolidates and distributes generic pharmaceuticals from producers and disperses them to healthcare facilities, drug stores, and other healthhealthcare carriers. The pharmaceutical segment was accountable for 80 % of the companys profits in fiscal 2014.
The clinical segment makes and disperses gloves, dress, drapes, and other low-technology medical products for use in various wellnesshealthcare centers. The department also develops ready-to-use medical kits for quicker surgery gain access to. The clinical section was responsible for 20 % of the business revenues for fiscal 2014.
Cardinal Healths primary competitive advantage originates from the sheer volume of its supply chain. The business serves over 100,000 wellness care locations daily. The size of their operations is truly remarkable. The business produced over $90 billion in profits over the last 12 months, primarily from the consolidation and distribution of generic pharmaceuticals and clinical products.Unlike mosta lot of the
dividend aristocrats I have actually assessed thereforeso far, Cardinal Health is in a low-margin company. The company has a net earnings margin of about 1.3 %. Cardinal Health might run in the healthhealthcare market, however it does not create its profits from state-of-the-art innovations or medical advancements. Rather, the business will continue to grow as long as the usage of pharmaceuticals and the total health care industry grows. I am unsure of much, but I find it extremely unlikely that the consumption of pharmaceuticals specifically and healthhealthcare use in basic will minimize over the next numerous years, or even decades. The low-tech scale and cost advantage that Cardinal Wellness has more than competitors develops an incredibly resilient competitive benefit that is unlikely to be decreased for a really long period.Growth Potential customers Cardinal Healths management has actually done an outstanding task of growing shareholder wealth. The company just recently entered into a 50 % -50 % joint-venture with CVS(NYSE: CVS). The joint venture creates a new company called Red Oak Sourcing. Red Oak Sourcing integrates the purchasing power of both businesses to realize lower costs than either might individually. The joint endeavor is for sourcing only and does not combine the 2 companies in any way except for for sourcing.Cardinal Wellness major expenditure is obtaining items from manufacturers. The Red Oak Sourcing partnership will more than double the business acquiring power, giving it a way to rapidly raise margins by lowering expenditures. The joint venture follows in the steps of Walgreens (NYSE: WAG)10-year arrangement with AmerisourceBergen( NYSE: ABC )to source generic pharmaceuticals. The Red Oak Sourcing joint venture better positions both CVS and Cardinal Health to contend in the low-margin generic pharmaceutical market. The joint venture puts CVS on equal footing with Walgreen for generic rates in drug stores.Aside from the Red Oak Sourcing venture, Cardinal Health has actually seen fast gains in China. For fiscal 2014, the business managed to grow profits 30 % in China.
In total amount, the company did$2.6 billion in sales in China for financial 2014. Cardinal Wellness is actively searching for medical wholesalers to acquire in China. The business is particularly trying to find smaller, tuck-in acquisitions, not a big single acquisition of a widely known company. With 30 % growth over the most recent fiscal year, the companys Chinese growth strategy is working well. I anticipate Cardinal Health to continue growing quickly in China as long as the Chinese economy remains to grow.Cardinal Wellness is anticipating EPS development of between 7 % and 12 % next year, with lower earnings growth. About 2 percentage points of development will certainly originate from
share repurchases internet of share issuances. The bulk of the growth is expected to come from organic development and margin enhancements as the company realizes gains from its Red Oak Sourcing endeavor. Over the previous decade, Cardinal Health has actually grown profits per share at a modest 5 % annually. I anticipate the business long-term growth to fall around 5 % a year, with 2 % originating from share repurchases and 3 % coming organically.Dividend Evaluation Cardinal Wellness currently has a dividend yield of about 1.8 % and a payment ratio of 36.5 %. The business fairly low payment ratio gives it room to raise its dividend quicker than long-term company development. Over the previous 5
years, Cardinal Health has actually grown its dividend payments at over 15 % a year, while profits per share have grown at about 9 %. The company has actually been slowly increasing its payment ratio over the last numerous years. I try to find Cardinal Wellness to remain to enhance its dividend faster than general business development for the next several years. The company has actually not revealed a target payment ratio, however it has plenty of space to grow dividends at a double-digit rate like it has actually done over the previous several years.Valuation Cardinal Wellness currently trades for a P/E ratio of 21.6, well above the Samp; P500s P/E ratio of 18.2. The business has actually traditionally traded at just 0.96 x the Samp; P500s P/E ratio. I believe Cardinal Wellness to be a high-quality company deserving a premium multiple of 1.1 x the Samp; P500s P/E ratio. The problem is, the Samp; P500 is presently misestimated relative to its long-term average P/E ratio of 15. If you use the long-term typical P/E ratio of the Samp; P500 as your guide and use the 1.1 x quality several, Cardinal Health should trade for a P/E ratio of in between 15 to 18 at reasonable value. I think Cardinal Wellness is presently rather misestimated at todays prices.Final Ideas Cardinal Health is a high-quality business with an affordable scale competitive advantage; one of the most long lasting competitive advantages. Its business design is more similarjust like companies like Wal-Mart(NYSE: WMT)and Amazon (NASDAQ: AMZN )than numerous other wellness care dividend aristocrats I have evaluated. That is, Wal-Mart, Amazon, and Cardinal Wellness create their competitive advantage by managing expenses and trying to offer services at the most affordablethe most affordable possible cost point. When companies with this technique reach enough scale(as all 3 have), their market position becomes really tough to dislodge since of the enormous amount of capital investment it would take to construct the circulation network neededhad to compete.Cardinal Wellness underlying business is amazing, but the stock is costly at this time. The companys average earnings per share development rate over the last decade paired with a typical dividend yield makes it not rank specifically highly using The 8 Policies of Dividend Investing. While the underlying company is outstanding, I believe there are much better top quality divided growth
stocks to invest in than Cardinal Wellness at this time.