Naturally you want to develop your own thesis – and in turn decide whether or not you personally believe in the company or industry – but the above is how you might go about generating a background on the company and security. To get a feel for the types of returns that today’s valuation could imply, it can be helpful to develop a baseline here as well.
Analysts are presenting anticipating annualized growth for the company to be around 10% over the intermediate-term. Given Cardinal Health’s past, this certainly appears reasonable. Although then again, the company is now much larger than it was and the percentage of “organic” funds available to retire shares is now subdued due to a higher dividend payout ratio.
Let’s scale it back a bit and suggest that Cardinal Health can grow by 7% annually over the next five years (keeping in mind this is merely a baseline). After five years you would anticipate that the company could be making $6.15 per share or thereabouts (which would combine “organic” company growth with reduced share count achieved through share repurchases). Given that analysts are anticipating earnings-per-share near $5.70 for fiscal year 2017, this doesn’t appear to be an outlandish assumption for three years further out into the future.
Should shares trade with the same trailing multiple in the future, you might anticipate a future share price of around $110. If the dividend were to grow by 10% annually, you’d anticipate collecting $12 or so in dividend payments (prior to thinking about reinvestment) which would represent a payout ratio of just under 50%. In total you might anticipate that a share of Cardinal Health could generate $122 worth of value in the coming half decade.
Expressed differently, you might suppose that Cardinal Health could provide annualized gains on the magnitude of 9% per annum. As a point of reference, that’s the sort of thing that would turn a $10,000 starting investment into $15,000 or so five years later. That’s how I’d start to think about an investment in Cardinal Health.
The propensity to reward shareholders through growth in the industry, strong dividend increases and share repurchases is certainly there. Naturally, things could turn out much better (say double-digit earnings growth) or much worse (for instance if profit growth started to stagnant and shares traded with a much lower earnings multiple). The idea is to think about the business, come up with a baseline and then determine whether or not that is compelling as compared to your applicable alternatives.
Final Thoughts
Cardinal Health Inc (NYSE:CAH) ranks as a buy and top 10 stock using The 8 Rules of Dividend Investing thanks to its:
– Low price-to-earnings ratio of 15.1
– High 10%+ expected earnings-per-share growth rate
– Low payout ratio of 35%
The company’s mix of growth, value, and safety makes it a compelling investment at current prices.
Click here to download a 1 page PDF detailing Cardinal Health’s competitive advantage, recession performance, and much more – straight from the Sure Dividend Newsletter.
Disclosure: This article is written by Eli Inkrot and originally published at Sure Dividend.
