Cardinal Health (NYSE: CAH) may not be a household name, but it deserves a place in an income investor’s portfolio. Cardinal Health is one of the Dividend Aristocrats, an exclusive list of companies in the S&P 500 that have increased their shareholder dividends for at least 25 years in a row.
In fact, the Cardinal Health dividend has increased each year for the past 31 years.
The stock has had a rough year. Cardinal Health shares have lost 20% of their value since the beginning of 2016. Fears of higher regulatory scrutiny towards drug pricing have soured investor sentiment throughout 2016.
But this has created an opportunity for investors to capitalize on the fear. Cardinal Health is a well-run company, with a highly profitable business and a clear path for future growth.
Cardinal Health Dividend Plus Growth
The best thing about Cardinal Health is that it provides investors with a nice mix of growth and dividend income, all in one stock.
Cardinal Health is a distributor of health-care supplies and pharmaceuticals. It supplies a number of different customers, which include retail, hospitals and other health-care businesses.
It has a massive supply network, and serves more than 20,000 pharmacies. Nearly three quarters of U.S. hospitals are served by Cardinal Health.
Such large scale gives Cardinal Health a highly profitable business model. The company generates more than $100 billion in sales each year. Management expects earnings to rise by 3% to 7% in 2016.
Going forward, Cardinal Health forecasts at least 10% earnings growth over the long run. It will achieve this in large part through its acquisition strategy.
After losing its contract with Walgreens Boots Alliance (NYSE: WBA) three years ago, Cardinal Health has turned to M&A to restore growth. For example, it spent $8.5 billion in acquisitions and capital expenditures in the past five years.
Since 2013, Cardinal Health spent $5.1 billion to acquire Cordis, The Harvard Drug Co. and AssuraMed. These buyouts expanded Cardinal Health’s position in pharmaceutical and medical distribution.
These acquisitions have helped soften the blow of falling drug pricing. Last quarter, earnings in Cardinal Health’s pharmaceutical segment declined by 19% due to lower pricing. Fortunately, the company should offset this with volume growth, as the U.S. is an aging population that will require greater health care going forward.
And, the various acquisitions have provided the company with revenue growth and the ability to realize significant cost synergies. This is why management maintains such an upbeat earnings forecast going forward.
Consistent profitability and growth is what has propelled the growth of the Cardinal Health dividend. Earlier this year, the company raised its dividend by 16% and simultaneously approved a new $1 billion share repurchase authorization over the next three years.
For Growth, Value, Income Investors
Cardinal Health stock has had a rough year. But the good news is that it is now priced attractively. The stock currently trades for a P/E ratio of 15. This is a significant discount to the S&P 500, which trades for a P/E ratio of 25.
As a result, Cardinal Health appears to be significantly undervalued.
The other positive about the stock sell-off is that it has elevated the Cardinal Health dividend yield to 2.5%, which exceeds the S&P 500 average dividend yield of 2%.
Going forward, concerns over drug pricing should fade, as Cardinal Health’s acquisition strategy provides the company with overall growth. Investors can expect double-digit dividend growth to continue, thanks to its 43% payout ratio.
This is a modest payout ratio that leaves plenty of room for its dividend growth streak to continue for many years.
Cardinal Health is an appealing stock pick for growth, value, and income investors alike.