Cardinal Health (CAH) scores extremely well for Dividend Safety (95) and Dividend Growth (91). The company has increased its dividend by 15% per year over the last five years and shows no signs of slowing down.
With a reasonable earnings multiple of 15.4x, now could be a good time to consider buying Cardinal Health for our Top 20 Dividend Stocks portfolio.
Business Overview
Cardinal Health was founded in the 1970s and has grown to become one of the largest healthcare companies in the world with over $100 billion in annual sales. It primarily makes money by distributing a wide variety of pharmaceutical and medical supplies.
The company does business with more than 5,000 pharmaceutical and medical surgical suppliers to serve over 25,000 U.S. retail pharmacies and provide products to more than 75% of U.S. hospitals. Overall, Cardinal Health sells over 2.5 billion healthcare products each year.
Cardinal Health’s Pharmaceutical segment generated 89% of the company’s total sales and 83% of its segment profit last fiscal year. This business distributes a wide range of branded and generic drugs, specialty pharmaceuticals, and over-the-counter products.
The company’s Medical segment distributes medical, surgical, and laboratory products to hospitals and other healthcare providers. This business accounted for 11% of Cardinal Health’s total sales and 17% of its segment profit last year.
By geography, roughly 95% of Cardinal Health’s sales are in the U.S., although it also has some meaningful operations in China.
Business Analysis
As middlemen, distributors typically generate very little gross profit on each sale they make. For example, Cardinal Health earned a paltry 5.6% gross margin last fiscal year.
These companies depend significantly on generating a high volume of sales to turn a meaningful profit. The best distributors to do business with are ones that offer the broadest range of products with the most reasonable prices and highest quality delivery standards.
As a result, distributors with massive distribution networks, long-standing customer contracts, and economies of scale are best positioned to exceed.
In healthcare, cost-effective distributors are especially important. Hospitals and pharmacies are under ever-increasing amounts of pressure to save money and reduce waste. If they can consolidate the number of distributors they work with, they can achieve greater efficiency and lower costs for their customers.
Cardinal Health’s scale and expertise provides it with advantages over smaller companies that allow it to profitably pursue some of the biggest deals in the industry. For example, the company established Red Oak Sourcing, a 10-year generic pharmaceutical sourcing venture with CVS Health in July 2014.
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