Company Description: Cardinal Health Inc. 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 linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CAH is trading at a premium to all four valuations above. Since CAH's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 192.3% premium to its calculated fair value of $29.38. CAH did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CAH earned one Star in this section for 1.) 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 company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 27 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 linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in CAH would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If CAH grows its dividend at 0.8% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company's peer group includes: AmerisourceBergen Corporation (ABC) with a 1.1% yield, McKesson Corporation (MCK) with a 0.6% yield and Owens & Minor Inc. (OMI) with a 0.0% yield.
Conclusion: CAH did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks CAH as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $34.31 before CAH's NPV MMA Differential increased to the $800 minimum that I look for in a stock with 27 years of consecutive dividend increases. At that price the stock would yield 5.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,000 NPV MMA Differential, the calculated rate is 10.0%. This dividend growth rate is higher than the 0.8% used in this analysis, thus providing no margin of safety. CAH has a risk rating of 1.75 which classifies it as a Medium risk stock.
CAH offers a diversified line of products and services and is well situated as one of the major players in the U.S. drug distribution industry. Intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. Free Cash Flow of 22% (down from 121%) is well below my maximum of 60%, and Debt to Total Capital of 254% (up from 114%) is well above my 45% maximum. CAH is currently trading well above my calculated fair value price of $29.38. For now, I will wait for a more opportune time to invest in CAH.
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.
Full Disclosure: At the time of this writing, I held no position in CAH (0.0% of my Dividend Growth Portfolio).
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Tags: CAH, ABC, MCK, OMI,
