Ouch! Good Yield but Poor Performance for Cardinal Health

CAH - Cardinal Health Inc

Cardinal Health Inc. is a global, integrated healthcare solutions provider. It is a leading distributor of pharmaceutical and medical products to pharmacies, hospitals and other healthcare providers in more than 60 countries including the US, Canada, and European and Asian markets.

Cardinal Health has become a leading household name with more than three million patients using its healthcare products. In addition, the company also supplies 10,000 specialty physician clinics, 6,700 laboratories, 26,000 pharmacies,

Cardinal Health has a huge presence in the U.S. in nearly 85% of the U.S. hospitals. It has operations in 46 countries and manages one of the country’s largest distribution networks. The company manufactures nearly 2.5 billion healthcare products each year.

Cardinal Health’s reportable segments are Pharmaceutical and Medical. Accounting for nearly 90% of the revenues, the Pharmaceutical is the company’s larger segment involved in the distribution of specialty and generic pharmaceutical, healthcare, and consumer products in the US. The Medical segment (constituting the remaining 10%) manufactures and distributes Cardinal Health and other branded medical, surgical and laboratory products, in the US and other key markets.

Investment Data

Revenue Growth & Market Exposure

With decades of healthcare experience, Cardinal Health has become the preferred partner for providing safe and secure channels for the delivery of medications. As one of the largest healthcare supply chains in North America, Cardinal Health is trusted for its distribution strategies which have resulted in superior inventory management reducing costs for its partners. The company owns one of the country’s largest distribution networks and engages with suppliers globally. With a presence in nearly 85% of the US hospitals, Cardinal Health occupies a dominant position in the healthcare industry.

Cardinal Health focuses on providing products and pharmaceuticals that are cost-effective and enhance supply chain efficiency from hospital to home. The company specializes in providing healthcare solutions to primary caregivers that focus on patient care and improve efficiency. Cardinal Health is known for its portfolio of high quality and value-oriented products spanning medical, surgical, pharmaceutical and specialty segments. The acquisition of Medtronic’s patient products has further expanded Cardinal Health’s medical segment portfolio.

Cardinal Health is expanding both organically and through acquisitions such as those of Cordis and the Patient Recovery businesses. Over the years, the company has grown its specialty business from a mere blood products operation worth $1 billion then, to a $15 billion business today. The company is also strengthening its medical distribution capabilities. Its medical segment witnessed a strong momentum during the last year driven by its Cardinal Health at Home, the Global Services division, and Patient Recovery businesses.

Cardinal Health has grown its revenues at 8.5% CAGR in the last five years. The company is expecting FY19 revenues to grow in the mid-single digit range. A well-recognized brand name, economies of scale, extensive distribution infrastructure and a strong focus on products and patient care are the company’s major strengths. The company is favorably placed to benefit from the improving trends in overall demand for healthcare and its transformation.

Dividends

Cardinal Health has achieved an impressive dividend per share growth of 14% CAGR over the last decade. The company has increased its dividend for 33 years in a row, making it a member of the prestigious S&P500 Dividend Aristocrat group. Cardinal Health last raised its dividend payout by 3.3% and sports an impressive yield of 4.3%. The company returned $580 million in dividends and repurchased $550 million in shares during FY2018.

The Medtronic portfolio (Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses or “the Patient Recovery Business”) acquisition is expected to provide synergies exceeding $150 million annually by 2020. This acquisition also gives an opportunity to leverage efficiencies in distribution and expand customer reach. Strategic acquisitions like these should also support the company’s future dividend hikes.

Cardinal Health continues to evaluate its product portfolio and cost structure. The company is evaluating its multiple upstream and downstream operations to cater to the opportunities in generic programs and customer contract renewals. Cardinal Health is expecting future growth to come from the pharmaceutical segment’s distribution and specialty solutions. The company should comfortably keep up with its single-digit dividend growth going forward.

Competition

The manufacture and distribution of pharmaceuticals, consumer healthcare products and medical devices is highly competitive. Cardinal Health competes with McKesson Corporation and AmerisourceBergen Corporation in the pharmaceutical segment. Additionally, the company faces additional pressure from regional wholesale distributors, self-warehousing chains, specialty distributors, third-party logistics companies, nuclear pharmacies, etc. The rise of generic pharmaceuticals is also increasing the competition. In the Medical segment, Medline Industries, Inc., Owens & Minor, Inc. and Becton Dickinson and Co. are Cardinal’s major rivals.

Bottom Line

Cardinal Health plays a critical role in the delivery of healthcare and has developed a solid reputation for high quality products and efficient operations. Given its strong brand recall and an excellent portfolio of products, the company stands a chance to benefit from rising demand for pharmaceuticals and healthcare solutions. Cardinal Health’s organic growth and acquisition strategies should support its future dividend growth streak.

Has Amazon’s ambitious plan to enter the pharmacy business impacted Cardinal Health this much? or is it simply poor execution? The dividend yield is good and doesn’t appear to be in danger but investors will want their money’s worth at some point.

CAH vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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