Company Description: Cardinal Health is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the above-linked PDF for a detailed description):
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
CAH is trading at a discount to Nos. 1 and 3 above. The stock is trading at a slight discount to its calculated fair value of $42.41. CAH earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the PDF for a detailed description):
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling four-year Div. > 15%
CAH earned three Stars in this section for Nos. 1, 2, and 3 above. A Star was earned since the free cash flow payout ratio was less than 60% and there were no negative free cash flows over the last 10 years. The stock earned a Star as a result of its most recent debt to total capital being less than 45%. CAH earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling four-year Div. > 15% means that dividends grew on average in excess of 15% for each consecutive four-year period over the last 10 years (2003-06, 2004-07, 2005-08, etc.). I consider this a key metric since dividends will double every five years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 16 consecutive years.
Dividend Income Vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page 2 of the PDF for a detailed description):
- NPV MMA Diff.
- Years to > MMA
CAH earned a Star in this section for its NPV MMA Diff. of the $5,978. This amount is in excess of the $1,900 target I look for in a stock that has increased dividends as long as CAH has. The stock's current yield of 2.53% exceeds the 2.42% estimated 20-year average MMA rate.
Memberships and Peers: CAH is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes AmerisourceBergen Corporation (NYSE:ABC) with a 2.0% yield, McKesson Corporation (NYSE:MCK) with a 0.8% yield, and Owens & Minor Inc. (NYSE:OMI) with a 3.2% yield.
Conclusion: CAH earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section, and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CAH as a Five-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $65.95 before CAH's NPV MMA Differential decreased to the $1,900 minimum that I look for in a stock with 16 years of consecutive dividend increases. At that price the stock would yield 1.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,000 NPV MMA Differential, the calculated rate is 10.6%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing a slight margin of safety. CAH has a risk rating of 1.25, which classifies it as a Low risk stock.
CAH offers a diversified line of products and services. Intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. The recent Express Scripts contract loss and the approaching renewal of the CVS Caremark (NYSE:CVS) and Walgreen (WAG) puts CAH in a perilous situation. CVS Caremark and Walgreen generates over 40% of its revenues.
The company generates strong cash flow, which provides flexibility for expansion, dividends, and share buybacks. CAH is currently trading below my fair value price of $42.41. However, its dividend yield is below my current minimum, which will keep me from giving CAH serious consideration at this time.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my disclaimer for more information.