Bert’s Recent Buy – Cardinal Health (CAH)

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!

Quickly, even though I reviewed this in my recent watch list, here are the updated metrics for CAH based on our Dividend Stock Screener:

  1. 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.
  2. 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.
  3. 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?

-Bert

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32 thoughts on “Bert’s Recent Buy – Cardinal Health (CAH)

  1. Very nice buy. I started a position with them on their first dip a few months ago. Wouldn’t mind loading up more now to lower the cost basis. The yield is lower, but the dividend growth rate is higher so it works out well long term.

    • Daze – congrats on starting the position a few months ago. When I first bought them their yield was even lower (closer to 2%). But now, that yield is creeping up towards 3% and I am liking it. Do you have a price point in mind??

      Bert

    • AC,

      They are now officially on my watch list. I think those are both great companies, so I am planning on doing some research this weekend to determine what entry price I will have. But thanks for pointing them out to me. Are you planning on buying??

      Bert

      • Yup, I bought $SJM @ $110.22… I should have waited a bit longer during the day to get in at a lower price entry but it is what it is. 🙂 You should buy $SJM as it is headquartered in Ohio! That’s where you and Lanny are from! Ha…

  2. Dear Bert,

    I feel silly admitting this but I never realized that the S&P/TSX had a Price per Earnings Ratio. Thanks for enlightening me.

    I’m holding off on purchasing right now as we’re getting our house ready to sell and I want a large emergency fund on hand.

    Besos Sarah

    • Sarah,

      Nothing to be silly about. I stumbled on the stat on Morningstar a few years back and have been using that ever since. It is nice that the websites put that together for you. Understand why you are holding onto cash for sure. The nice thing is that you should be able to unload a lot of capital once your house sells and you won’t need that emergency fund anymore 🙂

      Bert

    • Thanks. Agree completely with you. I’m not hiding from the fact that their are headwinds, I know that going into it. But I am looking further into the future and think they will have some great long term success!

      Bert

  3. Great buy and write-up Bert! I own 25 shares of CAH – bought in 2016 for an average price of 75. Looking to double that position now that the stock is under 70. Not too concerned about 2018 as an ‘investment year’ as my horizon is 20-30 years…

    Keep it up guys!

    Tall Investing

    • Thanks Tall Investing! Looks like we bought around the same time and are about to purchase at the same time haha We have ourselves a competition haha Love the long term view point. If anything, I love that 2018 is an investment year to right the ship and get it moving full speed ahead. Oh yeah, and they will still have a low payout ratio during this “off” year, so the dividend isn’t threatened.

      Take care,

      Bert

  4. I agree that CAH is a pretty good company with a strong dividend HISTORY. I don’t mean to poop in the punch bowl, but I’m not as optimistic about the FUTURE of the dividend as you.

    That’s because I don’t think the dividend payout ratio of 38% of adjusted forward EPS represents the whole story.

    I just published a post about this very issue today, so maybe it’s just fresh in my mind. I won’t take up a bunch of space in your comment section, but TLDR: the payout ratio as measured by FCF (rather than EPS) is ~72% for CAH, and their balance sheet is bloated with too much debt (imo).

    Let me be clear: I don’t think this is a horrible stock pick. I bet you’ll probably do pretty well, and I doubt the dividend is going to get cut tomorrow. It’s undervalued by a lot of metrics, and Mr. Market tends to overreact, especially in August when the robots rule the roost while the humans are on vacation.

    So don’t mistake the intent of my I comment or the post I published earlier. I understand why people use the dividend payout ratio as a core part of their stock screening process, and I realize that my process is probably OVERLY cautious in most cases.

    But let’s talk about it, yeah? Is the payout ratio really the best way to evaluate the safety of a dividend and its potential for future growth?

    Don’t we owe it to ourselves to look a little closer?

    • that’s a fair analysis Catfish. I’m not basing my entire decision based on the payout ratio. It is a key component, but that isn’t the only reason I am investing and it is definitely not the full story for what is going on with the stock. I thin it is a a great barometer for if a dividend cut is nearing. A company can’t payout more than their earnings, right? So I would be much more concerned if the payout ratio were creeping towards 100% and management was discussing an “investment/restructuring” year. For me, I see a 38% payout ratio and know that there is plenty of room there. I’ll stop by later and read your article because I am very interested in the topic.

      Thanks for the great comment.

      Bert

  5. Bert,
    Nice buy. I like CAH, but now my eye is strongly back on SJM – people will always need to eat, and I want to have my consumer defensive / staple sector as strong as possible (I like some others too, but its a wonder we have not yet had a recession in 9+ years!). A lot of people will scoff at the extra $30 odd you bring in with this buy, which whatever – let them. However, one day when you mic drop it will be such a sweet feeling leaving them thinking ‘wow did he win the lottery or something.’
    – Gremlin

    • Gremlin,

      Thanks. Oh trust me, SJM has caught my attention today and will be monitored very, very closely here. That is a company I have wanted to buy for a long, long time but the timing has never been quite right. Agreed, their products are amazing and are staples in every household whether we are in a boom or bust cycle.

      To your point, I’ll take every $30 gain I can to the bank. People won’t be laughing when they see how these small $30 additions add up over time and I’m retired somewhere sipping a drink on a beach.

      Take care!

      Bert

  6. I’m just wondering. Why do you compare the PE to the average market PE and not to the companies average PE? There are companies who are always undervalued compared to the average market, but that doens’t mean they are undervalued.

    Other then that, nice purchase. Good luck investing!

    • Pursuit2Freedom,

      Thanks for the comments! The starting point is with the broader market and making sure the stock is lower than the market. Otherwise, why would I invest in that company when I could just dump my money in an index funds. You raise a fair point, and when I perform full blown analyses, I’ll compare the company to competitors as well to identify which one has the lowest PE. But for today, I was specifically focusing on CAH in my portfolio, not CAH’s competitors as well. So I kept my analysis slowly at the individual stock level.

      Thanks for the comment.

      Bert

  7. Seems like a great buy Bert and I like the fact that the company is almost a dividend aristocrat. Nothing wrong with scratching the itch, especially since you’re doing so by strengthening you’re portfolio. That’s also a benefit of having cash available to invest in the market if you see an opportunity.

    • Thanks dividend portfolio. Agree completely, I’m lucky I had some cash around to allow me to make a move when ready. Hopefully there will be more cash available to do so soon to take advantage of opportunities such as SJM and others great deals at the moment. .

      Take care!

      Bert

  8. Bert – Good analysis of the financial situation, however you failed to answer the question Peter Lynch insists on – What is behind the story of this company? Moreover, what are the growth drivers for this company?

    I like the valuation of CAH, as you do, but I’m not sure I’m sold yet on the story. There are reports that CAH is perhaps thinking of getting into the Chinese market, but there are bound to be a lot of expenses with that, if true. So what makes this company better than its competitors MCK, ABC, or BDX?

    Truth is, we are not just buying the dividend, but the company. And although, as DGI investors, we love to see a good valuation and dividend growth, I think we all desire at least some capital appreciation as well.

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