This Dividend-Hiking Cash Flow Machine Should Be In Your Portfolio

Summary

  • Cardinal Health generated $1.4B in adjusted FCF in the first nine months of the year.
  • Falling interest expenses and lower integration costs will boost the FY 2017 cash flow by approximately $100M (without taking any growth into account).
  • The free cash flow yield of 8% is appealing.
  • Buying back stock is a great way to create more value for its shareholders. And the company can definitely afford to do so!

Introduction

I'm still surprised by the lack of attention here in Seeking Alpha for Cardinal Health (NYSE:NYSE:CAH), as even though this is a major company, not a lot of authors (or readers) seem to care about the company's performance. Very surprising, considering CAH is quite a consistent performer! Back in the first quarter I said the company's weak share price performance wasn't warranted, and the stock moved up by 15% but now came back down to the same level we were previously trading at in January. Is it time to pick up some more stock, or has something changed?

CAH Chart

CAH data by YCharts

Boring, boring, boring, but cash flowing!

Cardinal indeed is one of the most consistent performers I'm aware of and that's not different in the most recent quarter wherein the company's revenue increased by approximately 20% (compared to Q3 2015) to $30.7B. The margins seemed to remain quite consistent as well, considering the gross margin increased by approximately 15%. That being said, the operating income was 'just' $656M in the third quarter which is just 10% higher compared to the same quarter in the previous financial year.

Source: SEC filings

That did surprise me, but there are two relatively simple explanations for this. First of all, the expenses related to the recent acquisition were still weighing on the result (as the amortization and acquisition-related expenses increased by 40% to $108M, of which $54M was acquisition-related). On top of that, Cardinal also took a $5M litigation charge into account in the third quarter which was the complete opposite compared to Q3 FY 2015 as the company was able to recover $18M from its litigation expenses by then. Even if I'd keep the acquisition-related expenses, the adjustment for the litigation expenses (which obviously will always fluctuate on a quarterly basis) would result in an increase of the operating income

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We zoom in on capital gains and dividend income in European small-caps
As I'm a long-term investor, I'll highlight some stockpicks which will have a 5-7 year investment horizon. As I strongly believe a portfolio should consist of a mixture of dividend-paying stocks and growth stocks, my articles will reflect my thoughts on this mixture.

Disclosure: I am/we are long CAH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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