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My Favorite Dividend Aristocrat for Total Returns Today

My Favorite Dividend Aristocrat for Total Returns Today

Tuesday, 24 July 2018 01:22 PM Current | Bio | Archive

The Dividend Aristocrats are a select group of stocks in the S&P 500 Index, that have increased their dividends for at least 25 consecutive years. Out of the 500 stocks in the index, only 53—meaning just over 10%--qualify as Dividend Aristocrats.

Buying high-quality Dividend Aristocrats can generate hefty returns over time. Through 6/29/18, the Dividend Aristocrats returned 13.28% annually over the past 10 years, while the broader S&P 500 Index returned 10.17% per year in the same period.

That means the Dividend Aristocrats outperformed the benchmark index by over 3 percentage points per year.

Today, healthcare distributor Cardinal Health (CAH) is my favorite Dividend Aristocrat, because of its cheap valuation, high dividend yield, and future growth potential.

Business Overview & Growth Prospects

Cardinal Health operates in the healthcare sector. It is a distributor of pharmaceutical and medical products. Through its vast supply network and has a presence in nearly 85% of U.S. hospitals. Cardinal Health serves over 24,000 pharmacies, along with more than 10,000 specialty physician offices and clinics. In all, the company manufactures or supplies roughly 400,000 unique products.

In Cardinal Health’s most recent quarter, revenue increased 6% to $33.6 billion. Higher product volumes helped growth revenue, but weak pricing eroded margins. Cardinal Health’s adjusted earnings-per-share decreased by 9%, reflecting price erosion in its core pharmaceutical segment. Pharmaceutical revenue increased 5%, but segment profit declined 3% for the quarter. The company’s Medical segment helped offset weak results in pharmaceuticals, with 15% revenue growth and 34% profit growth.

Falling drug prices have weighed on Cardinal Health’s core pharmaceutical division over the past year. Fortunately, the company still has long-term growth potential. The U.S. is aging, meaning demand for healthcare products and services should only increase moving forward. And, Cardinal Health’s recent earnings report showed signs of stabilization in pharmaceutical prices. Cardinal’s joint venture with CVS Health (CVS), called Red Oak Sourcing, has helped the two companies negotiate better generic pharmaceutical prices.

Cardinal Health is also making significant acquisitions to boost growth. For example, in 2017 Cardinal Health acquired the Patient Recovery business from Medtronic (MDT) for $6.1 billion, which will expand its product portfolio. Cardinal Health expects the acquisition will add $0.55 to next year’s earnings per share, and it will be increasingly accretive each year afterwards.

Expected Returns

Cardinal Health’s future returns will consist of earnings growth, dividends, and a rising stock valuation. Despite the short-term pricing challenges, Cardinal Health could still grow earnings by 8%-10% per year over the next five years, due to the various catalysts mentioned above. In addition, the stock has a current dividend yield of 3.8%, which pays investors well to wait for the turnaround to materialize.

The dividend is secure, with room for future increases. Cardinal Health has increased its dividend for over 30 consecutive years, and its dividend payout ratio should be below 50% in 2018, based on earnings estimates. This leaves plenty of room for continued dividend increases next year and beyond.

Lastly, Cardinal Health stock looks cheap at its current valuation. Shares trade at a price-to-earnings ratio of just 10.1, based on 2018 adjusted earnings forecasts of $4.90 per share. Cardinal Health stock has traded for an average price-to-earnings ratio of 15.5 since the company spun-off its CareFusion segment. If Cardinal Health trades back to this level, the valuation expansion could add 9% per year to annual returns.

The combination of 9% annual earnings growth, the 3.8% dividend yield, and 9% returns from valuation changes, would result in annual shareholder returns of approximately 21.8% over the next five years.

Disclosure: I am long Cardinal Health (CAH)

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Healthcare distributor Cardinal Health (CAH) is my favorite Dividend Aristocrat, because of its cheap valuation, high dividend yield, and future growth potential.
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Tuesday, 24 July 2018 01:22 PM
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