This article originally appeared on The DIV-Net June 22, 2009.
Linked here is a detailed quantitative analysis of Cardinal Health Inc. (CAH). Below are some highlights from the above linked analysis:
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: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
CAH is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, CAH is trading at a 32.9% discount. CAH earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
CAH earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. CAH has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 13 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)? 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:
- NPV MMA Diff.
- Years to > MMA
CAH earned one Star in this section for 1.) above. The NPV MMA Diff. of the $16,929 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 19.0% per year, it will take 8 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.06%.
Other: CAH is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company offers a diversified line of products and services and has good growth prospects in its contract drug-making and its drug dispensing systems. CAH plans to spin-off off 80% of CareFusion this summer (2009) pending receipt of financing, investment-grade debt ratings and regulatory approvals. Risks include the loss of major accounts, changes in contracts with drug-makers/retailers and failure of the planned spin-off.
Conclusion: CAH earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks CAH as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $41.49 before CAH’s NPV MMA Differential fell to the $7,500 that I like to see for a stock with 13 consecutive years of dividend increases. At that price the stock would yield 1.43%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 16.2%. This dividend growth rate is below the 19.0% used in this analysis, thus providing a margin of safety. CAH has a risk rating of 2.00 which classifies it as a medium risk stock.
CAH is trading below its buy price of $41.49. As with any 5-Star company, CAH has a lot of excellent attributes that dividend investors look for when selecting a stock. Recently CAH increased its dividend 25%, However, its forward yield is still only 2% . Though I am looking for a higher initial yield to initiate a position, the company has earned a spot on my watch list. For additional information, including the stock’s dividend history, please refer to its data page.
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 Income Portfolio).
What are your thoughts on CAH?