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 to 10,000 specialty physician clinics, 6,500 laboratories, and 29,000 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 nation’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 reduced costs for its partners. 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.

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 product operation to a $15 billion business today. The company is also strengthening its medical distribution capabilities. Its medical segment is experiencing significant growth momentum driven by Cardinal Health at Home, the Global Services division, and Patient Recovery businesses.

Cardinal Health had a modest net positive impact related to COVID-19 in Q3. The company witnessed sales growth from Pharmaceutical distribution customers, strong performance in generics program and customer contract renewals, and delivered earnings of $1.62 per share, an increase of 2% from the prior year. Cardinal Health’s revenue increased by 11% versus last year to $39.2 billion. The company has been a leading supplier of personal protective equipment (PPE) to hospitals and should gain from the increasing demand for these products. It, however, expects a negative impact on both earnings and margins in the upcoming quarter, due to declines in elective procedures, lower physician office visits in the US, and an expected reversal of accelerated Pharmaceutical sales. 

The company might also face challenges in the form of potential export restrictions and declining manufacturing capabilities in key countries that may affect the availability of finished goods or raw materials ultimately. Cardinal Health will continue to invest in its IT infrastructure, including customer ordering platforms and key businesses such as at-Home and Specialty to drive future growth.

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 34 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%. It sports a yield of 3.8% but has a high payout ratio. It returned $1.2 billion to shareholders in dividends and stock repurchases and paid down $1.1 billion of long-term debt in 2019.

The Medtronic portfolio or the Patient Recovery Business acquisition is expected to provide synergies exceeding $150 million annually by 2020. This acquisition has further expanded the Medical segment’s portfolio of self-manufactured products. Strategic acquisitions like these should also support the company’s future dividend hikes. Cardinal Health’s cost optimization programs are estimated to generate more than $500 million in cost savings in five years or less. The company also paid down ~$90 million of long-term debt paying a total of $880 million through the first nine months of FY2020 and is on track to reduce outstanding long-term debt by at least $1 billion in FY2020. It also completed the $350 million accelerated share repurchase program in the latest quarter. Cardinal Health ended the quarter with a cash balance of $2.3 billion and has access to an additional $3 billion of liquidity. It reaffirmed its FY2020 EPS guidance range of $5.20 to $5.40.

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.  It was successful in renewing its contracts for another four years with its major customers like Kroger and CVS. 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 are 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 might face temporary headwinds in its Pharma and Medical business, but these should rebound once the situation normalizes. The company is, also investing in higher-margin services businesses e.g. Connected Care, and continues to grow Specialty Solutions and Cardinal Health at Home. Cardinal Health plays a critical role in the delivery of healthcare and has developed a solid reputation for high-quality products and efficient operations. It also remains committed to returning cash to shareholders in the form of a dividend. 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 in the future. 

CAH vs INDICES

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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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