Earnings-per-share and operating earnings have been growing at a double-digit rate on an adjusted basis over the past five years, while shareholders have seen exceptional gains during this time.
A $10,000 starting investment back at the beginning of fiscal year 2011 would have been worth $27,000 fiscal year 2015. This was possible due to strong underlying earnings growth, an increase in the per share valuation multiple and a solid commitment to shareholder returns.
Cardinal Health is a Shareholder Friendly Business
Speaking of shareholder returns, here’s what Cardinal Health’s capital deployment has looked like from fiscal year 2011 through 2015:
Cardinal Health Capital Allocation
Source: Cardinal Health 2015 Annual Report
With regard to improving the business, Cardinal Health has spent $1.3 billion on capital expenditures and $5.7 billion for acquisitions. This is the part that helps to further grow the business down the line.
The second part is shareholder return – with $1.8 billion going toward dividends and $2.9 billion used for share buybacks.
Cardinal Health Inc (NYSE:CAH) has increased its dividend for 31 straight years, making the company a Dividend Aristocrat. Despite this, I’d contend that the company still isn’t that well known among dividend investors.
Part of this can be explained by the dividend yield.
At the start of the year Cardinal Health was paying out a $0.387 quarterly dividend or $1.55 on an annual basis. With a share price near $90, that equates to a dividend yield of just 1.7% – hardly the sort of thing that jumps off your stock screen.
Since that time, the dividend has increased to an annual rate of $1.80 and the share price has declined to under $80 – leading to a “current” yield closer to 2.3%. That’s still not spectacular, but it is getting better. Moreover, the company has certainly has the ability to make further increases as earnings are anticipated to grow nicely and the payout ratio remains well below 50%.
In addition to the recent dividend increase (a 16% jump), Cardinal Health also announced that it was increasing its share repurchase program by $1 billion. As noted above, this aspect of capital allocation has been even more robust than the dividend payment.
In the last ten years the number of common shares outstanding have declined from about 425 million to under 330 million. Expressed differently, nearly one out of every four shareholders that existed in 2005 have been bought out by the company on your behalf since.
It’s clear that the propensity and ability for Cardinal Health to reward shareholders in the past has been there. Which brings us to today.
Cardinal Health’s Future Growth Potential & Total Return Analysis
To be sure challenges exist ranging from general industry uncertainty and thin margins to possible pricing pressure resulting from increased drug price transparency. Of course there are potential catalysts as well.
For one thing, the industry is well situated for growth. Some industries you can see the decline coming – I think of things like coal, landlines or physical newspapers fitting this description. That doesn’t mean that investments still can’t work out well in those areas, it’s just that you have to be more aware of the growth (or lack thereof) characteristic.
With healthcare you don’t really have that problem. The population is not only aging, but also living longer – both bode well for healthcare demand.
The second item is that Cardinal Heath is a very large firm, as detailed above. So the company stands to benefit as the industry grows. This doesn’t have to play out – Cardinal Health could lose its way, market share or both – but at the very least it gets a good shot at capturing its fair share of economic rents in this arena.
Here’s a closer look at the types of strategic priorities that Cardinal Health is looking at and has a solid advantage in capturing:
Source: Cardinal Health, At A Glance
