Recently, I’ve had an itch to purchase a stock and I was motivated as heck to scratch the itch. The motivation is coming from all directions. Whether it was from seeing my cash balance increase since I have been hoarding cash while preparing to move into our house, seeing impressive growth rates in our monthly dividend investing income summary from the community, and quite frankly, watching Lanny to continue to add to his portfolio and see his dividend income soar. We all motivate each other and push each other, and seeing all of you crush it has motivated to move some cash from my recent “hoard” to my investment account and add a company that is on my last watch list. I still have a long, long, way to go if I am going to catch Lanny. But heck, I have to start somewhere, right?? All, check out why I added to my stake in Cardinal Health, Inc. (CAH) the other day.
Why Cardinal Health (CAH)?
The company released earnings in the beginning of August and let’s just say that the company’s stock price has subsequently taken a beating. August 2nd was the first trading day after the earnings release. The company’s stock price as of the closing bell on August 1st was $77.207. The next day, CAH’s stock price closed at $70.98. Now, CAH’s stock price is in the mid-$60s. So I wanted to read the earnings release and review the transcripts of management’s earnings call to gain an understanding of what exactly happened and what caused the fall.
First, management stated that their FY 17 EPS guidance will be on the lower end of the range. They are already setting the expectation in our minds to not expect an earnings “surprise” this year. In addition, management also lowered their fiscal year 2018 earnings guidance. Management is forecasting mid-single digit revenue growth and a forward annual non-GAAP EPS range of $4.85 – $5.10. After reading their earnings call transcript and earnings release, pricing pressures in the pharmaceutical industry were one of the leading headwinds for their current earnings forecast and it appears the company will face similar pressures in the next fiscal year.
Second, management will use 2018 as an opportunity to investing the company, restructuring various incentives and investing in the technology needed to become a strong company after the fiscal year. My take: 2018 will not be that strong of a year; however, I am a fan of the long-term investments that are being made that will help the company continue to remain competitive in a low profit margin industry. It is much better to hear that investments are being made and management is aware of the issues versus trying to maintain the same tired approach. Of course though, I still want to run CAH through our stock screener to see what kind of impact the reduction in forward guidance has on their valuation. Because regardless of the moves that management is making, if the company is not considered undervalued based on our stock screener, I am not interested in buying!
- P/E Ratio Less than the S&P 500 – CAH’s forward P/E ratio is ~13.25X using the low-end of the reviewed FY 18 guidance discussed above. Well below the broader market. PASS.
- Payout Ratio Less than 60%– 38% when using the lower end of the revised guidance. This is huge for me in my analysis of CAH, especially considering that management lowered their forward outlook. I would have been concerned if the company already maintained a high payout ratio and had a bad forward guidance. But having a payout ratio of only 38% still provides management with a lot of room to grow their dividend going forward. PASS.
- History of Increasing Their Dividend – I love Dividend Aristocrats and man CAH is close to becoming one. The company announced a 3% dividend increase in May. This was the company’s 21st consecutive annual dividend increase. Based on the company’s history and their recent dividend increase, I say this final metric is a PASS.
The purchase – CAH
The company has taken a beating recently, they pass all of the metrics of our stock screener, and I am comfortable with the long-term future of the company despite the reduction in forward earnings guidance in 2018. Yeah, to me, this was a no brainer for me. In my watch list I mentioned that I was looking to add to a position based on limited resources, so this investment really checks all of my boxes.
I purchased 15.8759 shares on Tuesday at $65.20 per share, adding $29.36 in forward dividend income to my portfolio. Now, my full position in CAH is 67.0554 shares, producing $124.025 in forward dividend income. In the short-term, I’ll consider the investing itch scratched. While this investment may not have been large, I just have to keep reminding myself that EVERY DOLLAR COUNTS and makes a huge difference in the end game. Plus, there were two more companies on my watch list and plenty of other great companies out there. So who knows if my next purchase will be far behind.
What do you think of my purchase? Are you initiating or adding to a current position in CAH? What are your thoughts about the earnings release and the reduction in the company’s forward guidance? Would you have looked elsewhere if you were me? If so, what other companies are you considering?