By Nick McCullum
Cardinal Health (CAH) has lots of the traits of a high-quality dividend inventory.
The firm operates in an oligopoly (together with mbadive rivals AmerisourceBergen (ABC) and McKesson (MCK)), which permits it to generate important income with comparatively low quantities of competitors.
This has led to improbable long-term dividend progress for the corporate’s shareholders.
In reality, with 32 years of consecutive dividend will increase, Cardinal Health is a member of the unique Dividend Aristocrats record – which incorporates solely firms with 25+ years of dividend will increase.
Despite the corporate’s improbable long-term monitor file, Cardinal Health will not be common within the markets proper now. The inventory is down greater than 25% from its peak earlier this yr and is presently buying and selling down ~2% at this time after its first-quarter earnings launch.
Anytime a inventory declines after earnings, traders ought to examine whether or not this short-term market pessimism presents a shopping for alternative.
With that in thoughts, this text will focus on Cardinal Health’s first-quarter earnings launch intimately and badyze whether or not the corporate presently holds enchantment for dividend progress traders.
Financial Performance Overview
In Cardinal Health’s fourth-quarter earnings launch (which isn’t the discharge that this text is targeted on), the corporate introduced new steering for fiscal 2018 that upset the markets and resulted in an ~Eight% decline within the firm’s inventory value. The new steering was for non-GAAP diluted earnings per share of $four.85-5.10, down from $5.40 in fiscal 2017.
This steering is offered earlier than discussing the corporate’s 1Q2018 outcomes as a result of Cardinal Health is on tempo to fulfill this steering. Although just one quarter has handed up to now, we consider that the markets have reacted irrationally to the corporate’s monetary efficiency.
Moving onto the corporate’s monetary efficiency, Cardinal Health’s first-quarter earnings launch noticed revenues enhance 2% to $32.6 billion whereas GAAP working earnings decreased by 51% to $262 million and GAAP diluted earnings per share decreased by 63% to $zero.36.
Importantly, Cardinal Health’s GAAP monetary outcomes have been considerably impacted by the amortization of acquisition-related intangible property in addition to restructuring prices related to a brand new surgeon glove direct distribution settlement. Because of this, it’s way more significant to contemplate Cardinal Health’s non-GAAP monetary efficiency. Both are proven beneath.
Source: Cardinal Health First-Quarter Earnings Presentation, slide four
On a non-GAAP foundation, Cardinal Health noticed working earnings lower by 9% to $610 million whereas diluted earnings per share decreased by 12% to $1.09. While these declines are bigger than the corporate’s full-year steering (which requires earnings per share down 7.9% on the midpoint of the steering band), it’s doubtless that the corporate’s efficiency will speed up by the yr because the newly-acquired Medtronic property are built-in extra absolutely.
Investors also needs to observe that Cardinal Health’s efficiency continues to be stratified by phase. The Medical phase has been rising far quicker than the Pharmaceutical phase in current quarters, and this pattern continued in the latest quarter.
More particularly, the bigger Pharmaceutical phase noticed income enhance by 1% whereas phase revenue declined by 13%.
Source: Cardinal Health First-Quarter Earnings Presentation, slide 5
Meanwhile, the Medical phase posted 14% income progress and 1% progress in phase revenue.
Source: Cardinal Health First-Quarter Earnings Presentation, slide 6
The Medical phase will home the $6.1 billion value of property that Cardinal Health acquired from Medtronic earlier this yr. It is probably going that this phase will proceed to submit relative outperformance shifting ahead.
As mentioned, the corporate is on tempo to attain its fiscal 2018 monetary steering. In the corporate’s first-quarter earnings launch, administration reaffirmed steering of mid-single-digit income progress and $four.85-5.10 of adjusted earnings per share.
Source: Cardinal Health First-Quarter Earnings Presentation, slide 9
To conclude, Cardinal Health’s monetary efficiency was in keeping with administration’s expectations. We consider that the small ~2% drawdown on this already low cost inventory is one more alternative to accumulate attractively priced publicity on this recession-resistant Dividend Aristocrat.
Moving on, the following part will focus on the brand new government transition plan that was introduced similtaneously Cardinal Health’s first-quarter monetary efficiency.
Executive Transition Plan
As mentioned beforehand, Cardinal Health additionally introduced a brand new government succession plan when it reported first-quarter earnings.
More particularly, the corporate introduced that it has named Mike Kaufmann, its present Chief Financial Officer, as the corporate’s CEO efficient January 1, 2018. He will succeed Cardinal Health’s present CEO, George Barrett, who has been in his function since 2009 and can proceed to function Executive Chairman of Cardinal’s board of administrators by its annual badembly in November of 2018.
Here’s what we find out about Cardinal Health’s new CEO.
Mike Kaufmann is a 27-year veteran of Cardinal Health. He presently has duty for the entire firm’s monetary actions along with overseeing the corporate’s world sourcing for each of its segments (Pharmaceutical and Medical).
Kaufmann initially joined Cardinal Health in 1990 and has served as CFO since 2014. Prior to baduming the CFO function, Kaufmann served in a variety of management positions throughout operations, gross sales, and finance in all areas of the corporate. He performed an vital strategic function in organizing partnerships like Red Oak Sourcing with CVS (NYSE:CVS) and the creation of Fuse, Cardinal’s expertise innovation middle.
As somebody who’s considerably youthful than the present CEO (54 in comparison with 62) in addition to being well-tenured on the group (27 years), Mr. Kaufmann looks as if a stable match for the highest function at this healthcare large.
We’re not the one ones who like the choice. Here’s what Cardinal Health’s present CEO needed to say about his successor within the press launch:
“As I approach a decade with Cardinal Health, it feels very natural to hand the baton to Mike, who has been a close and trusted partner to me and an integral part of driving our strategy. Mike brings tremendous knowledge of our business, a pbadion for excellence, and a commitment to the values and mission of our organization, and he has the respect of our entire organization. The steps we’ve taken to expand our reach and enhance our critical role within the healthcare industry, including our recent acquisition of Medtronic’s Patient Recovery business, position Cardinal Health well for the future. Mike is a superb leader and operator, well-prepared to take the reins and guide us forward to leverage the full potential of Cardinal Health.”
Moreover, here is what Mr. Kaufmann himself needed to say about his management appointment:
“I am honored to be selected as Cardinal Health’s next chief executive. George and I have worked side by side for years, and I look forward to continuing our partnership over the next year in ensuring a successful transition. George has built a powerful legacy and strategy that I am proud to have helped craft. I look forward to working with him and our incredibly talented and dedicated team to build on the strong foundation we have in place and further enhance the value we provide to all of our stakeholders, while never losing sight of our ultimate goal of supporting our partners in the critical work they do serving patients and their families.”
Unsurprisingly, the corporate has not offered any perception into why its present CEO is retiring. Given his age (62) and tenure with the corporate (practically a decade as CEO), it’s doubtless he is able to retire from the workforce completely, and we consider this to be the most certainly impetus for this management change. Moreover, we consider that the corporate’s present CFO is a logical option to badume the helm at Cardinal Health.
Valuation & Expected Total Returns
Cardinal Health continues to have a really enticing complete return profile primarily based on its valuation, dividend yield, and our expectations for its earnings per share progress.
As talked about, Cardinal Health’s fiscal 2018 monetary steering requires adjusted earnings per share of $four.85-5.10. The midpoint of this steering band ($four.975) mixed with the corporate’s present inventory value of $60.55 implies a price-to-earnings ratio of simply 12.1.
A 12.1x earnings a number of is lower than half the typical valuation throughout the S&P 500. Moreover, it’s a important low cost to Cardinal Health’s long-term common valuation, as proven beneath.
Source: Value Line
Cardinal Health’s present price-to-earnings ratio is 12.1 and its long-term common price-to-earnings ratio is 16.Eight. To perceive how compelling this worth alternative may be for future shareholder returns, contemplate this: if the corporate’s valuation reverts to its long-term common over a interval of 5 years, this might add 6.Eight% per yr to its annualized complete returns.
Fortunately, valuation will not be the one issue that may add to Cardinal Health’s future returns. The firm’s present dividend yield of three.1% is noticeably elevated from its regular ranges.
Cardinal Health additionally has important alternatives to develop its adjusted earnings per share, significantly as soon as the present pricing struggle amongst wholesale drug distributors slows down. Investors can acquire a way of how rapidly Cardinal Health is prone to develop by contemplating the corporate’s historic progress fee (proven beneath).
Source: Value Line
Since 2009 (when Cardinal executed the transformative spinoff of CareFusion which resulted in its 42% decline in adjusted earnings), the corporate has compounded its backside line at 7.5% per yr. While Value Line is anticipating 13% earnings progress for Cardinal over the following a number of years, we consider extra traditionally related 6-Eight% progress is possible shifting ahead.
Altogether, Cardinal Health has a really enticing complete return profile comprised of:
- three.1% dividend yield
- 6-Eight% adjusted earnings per share progress
- Significant valuation enlargement alternatives
We consider that Cardinal Health offers a recession-resistant funding alternative with double-digit complete return potential.
While the markets appear upset with Cardinal Health’s earnings launch (the inventory is down about 1.5% as I write this), the corporate is definitely performing in keeping with its communicated expectations.
Moreover, the inventory continues to commerce at a persistent low cost to its long-term common valuation a number of.
We proceed to love Cardinal Health for the long-term, buy-and-hold complete return investor. The firm earns a purchase suggestion from us and has particular potential for market-beating efficiency shifting ahead.
Disclosure: I’m/we’re lengthy CAH.
I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.