Updated March 18, 2021 by Bob Ciura
When it comes to dividend growth stocks, not many stocks can outperform the Dividend Aristocrats. The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index with more than 25 consecutive years of dividend increases. These companies have managed to increase their dividends every year without exception, even during recessions.
The Dividend Aristocrats have a proven ability to grow their dividends even during an economic downturn. We have compiled a complete list of all 65 Dividend Aristocrats along with key metrics like price / earnings ratios and dividend yields.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats by clicking the link below:
But Dividend Aristocrats can also run into challenges from time to time. One of the dividend aristocrats struggling in a tough climate is healthcare provider Cardinal Health (CAH).
Cardinal Health is currently being challenged by falling drug prices, the consequences of the opioid crisis and the threat of new competition in drug distribution. As a result, stocks are trading ~ 30% lower than they were five years ago.
At the same time, the company has increased its dividend for over 30 consecutive years. This track record speaks for the resilience of Cardinal Health’s business model.
The company remains highly profitable and is making progress on its turnaround initiatives. Cardinal Health is an attractive dividend stock because of its dividend yield of 3.4% and annual dividend increase.
Cardinal Health was founded in 1971 and is one of the “Big 3” drug distribution companies alongside McKesson (MKC) and AmerisourceBergen (ABC). Cardinal Health serves over 24,000 US pharmacies and more than 80% of the country’s hospitals.
The company has two operating segments: Pharma and Medicine. The pharmaceutical segment is by far the largest in the company as it accounts for almost 90% of total sales. The pharmaceutical segment sells branded and generic drugs as well as consumer goods. It sells these products to hospitals and other healthcare providers.
Meanwhile, the medical segment sells medical, surgical and laboratory products to hospitals, surgery centers, clinical laboratories and other service centers.
As in previous years, the business climate for Cardinal Health is difficult. One of Cardinal’s major challenges is drug price deflation, which is negatively impacting margins in the company’s core pharmaceuticals segment. In addition, this could remain a challenge if political and competitive pressures on drug prices persist.
Added to this is the potential for new entrants such as Amazon (AMZN), which acquired PillPack for $ 753 million. Previously. The wafer-thin edges protected the “Big 3” drug dealers from external competitors. However, Amazon’s potential entry into space poses a significant threat to the established players. Even so, Cardinal Health remains profitable and the dividend is still covered.
Since 2010 Cardinal Health has increased both earnings and dividends by double digits. However, this growth has clearly stalled in recent years.
On February 5, 2021, Cardinal Health released the results of the second quarter of the fiscal year 2021 for the period ended December 31, 2020. (Cardinal Health’s fiscal year ends June 30.) For the quarter, the company reported revenue of $ 41.5 billion, up 5% over the second quarter of 2020. On an adjusted basis, the company posted earnings of $ 514 million, or $ 1.74 per share, compared to $ 448 million, or $ 1.52 per share, in the second quarter of 2020.
The final quarter was a significant step in the right direction for Cardinal Health as the company posted adjusted earnings per share growth of 14.5%. The medical segment was again the leader with sales growth of 7% and earnings growth of 21%.
Source: Investor Presentation
For fiscal 2021, Cardinal Health expects adjusted earnings per share in a range of $ 5.85 to $ 6.10. This is an increase over previous projections of adjusted earnings per share from $ 5.65 to $ 5.95. In that regard, Cardinal Health’s adjusted EPS for fiscal 2020 was $ 5.45. In the middle of the revised forecast, the company expects adjusted EPS growth of ~ 10%.
Additionally, there are several catalysts the company can use to return to earnings growth going forward. Some of its specific growth catalysts are acquisitions, easing price deflation, growth in specialty products, and cost reductions. Taken together, we forecast 3% annual EPS growth for the next five years.
Competitive advantage and recession performance
The greatest competitive advantage for Cardinal Health is its sales ability, which makes it very difficult for competitors to enter the market successfully.
Cardinal Health sells its products to approximately 90% of the US hospitals. It serves more than 29,000 US pharmacies and over 10,000 specialist practices and clinics. In addition, Cardinal Health manufactures and markets more than 50,000 types of medical products and procedural kits. The company’s home health care service provides more than 3.4 million patients with more than 46,000 products.
In addition, Cardinal Health operates in a stable, high-demand industry. The company should remain profitable at all times, as a distribution of pharmaceutical products will always be required.
Here’s a look at Cardinal Health’s earnings per share during the Great Recession:
- 2007 earnings per share of $ 3.41
- 2008 earnings per share of $ 3.80 (up 11.4%)
- 2009 earnings per share of $ 2.26 (down 40.5%)
- 2010 earnings per share of $ 2.22 (1.8% decrease)
Part of that has to do with the recession. Note, however, that the financial results were achieved by Cardinal Health essential Affected by the spin-off of CareFusion Corporation, which closed in 2009. Despite this spin-off, segment sales, segment earnings and the company’s dividend continued to rise during this period.
In addition, profits returned to growth in 2011 and had a strong upturn through 2017. With people always in need of their medications and health products regardless of the economic climate, Cardinal Health could be seen as more recession-resistant than the average company.
Valuation and expected return
Based on expected adjusted earnings per share of $ 5.98 for fiscal 2021 and a share price near $ 59, Cardinal Health is currently trading at a P / E of 9.8.
Cardinal Health has been trading hands with an average P / E of roughly 14-15 times its 2010 profit. However, it did so at a time when growth was much more robust. We used multiples of 10X profit as the starting point for fair value to account for our lower expected growth rate and risks in the industry. Given the current valuation, that translates to a modest annual increase in shareholder return of 0.4% over the next five years.
However, if the company can return to positive earnings growth, it could warrant a higher valuation. For example, Cardinal Health’s stock valuation could improve due to reduced litigation risk. However, we prefer to be careful in estimating fair value.
In addition to changes in the valuation multiple, future returns are generated from earnings growth and dividends. We anticipate Cardinal Health to grow earnings per share 3% per year, largely driven by revenue growth and share buybacks.
Finally, the stock has a current dividend yield of 3.4%, partly due to a growing payout ratio, but mostly due to a lower stock price in recent years. While the pace of dividend growth has slowed, the starting yield is solid. As a dividend aristocrat, Cardinal Health is likely to keep increasing its dividend every year. In addition, with a forecast payout ratio of around 32% for the 2021 financial year, the dividend appears certain.
Taken together – average growth and an above-dividend return offset by minor valuation headwinds – our expected total return for Cardinal Health over the next five years is 6.8% per annum. This currently qualifies the Cardinal Health share as a hold.
The economy of the healthcare distribution industry has deteriorated in recent years. This has implications for all major players, including cardinal health.
Fortunately, Cardinal Health continues to grow its sales. And the company has taken a number of initiatives designed to bring it back to positive earnings per share growth in the future.
High quality companies like Cardinal Health have survived difficult times and will do so again. The company’s history, its dividend history, and its high current yield of 3.4% make the stock attractive to high-income investors. The expected total returns remain below our buy rating requirement, which will hold the stock.
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