Cardinal Health (CAH) its guidance Tuesday morning, causing its stock price to plunge nearly 12% on the day.
The company previously cut its profit guidance in October 2016, but today’s news was clearly still a big surprise.
Many investors like owning dividend aristocrats such as Cardinal Heath because they have been less volatile than the broader market.
Let’s take a closer look at why the market was so disappointed with Cardinal Health’s business update and if the stock could be an attractive investment opportunity for our Top 20 Dividend Stocks portfolio.
How does Cardinal Health make money?
Founded in 1971, Cardinal Health is one of the largest healthcare companies in the world. The business primarily makes money by distributing a wide range of pharmaceutical products and medical supplies (2.8 billion healthcare products are manufactured or sourced by Cardinal Health each year).
Over 70% of U.S. hospitals use Cardinal Health’s resources, and the company serves more than 25,000 pharmacies.
Cardinal Health splits its business into two segments. The Pharmaceutical segment accounts for 90% of sales and 85% of profits. This unit distributes a wide range of branded and generic drugs, specialty pharmaceuticals, and over-the-counter products.
The company’s Medical segment accounts for 10% of sales and 15% of profit. It distributes medical, surgical, and laboratory products to hospitals and other healthcare providers.
Cardinal Health is essentially a middleman in the healthcare sector, making purchases from drug manufacturers and selling its acquired inventory for a small profit to pharmacies and hospitals.
The company’s operating margin typically sits between 1% and 2%, reflecting the small sliver of profit Cardinal Health makes on each sale. The firm therefore depends on generating a high volume of sales to turn a meaningful profit.
The most attractive distributors are able to offer a wide range of products with competitive prices and dependable delivery standards.
They tend to benefit from having substantial distribution networks, long-standing customer contracts, and economies of scale.
Why did Cardinal Health’s stock drop?
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