Growing, Growing, Growing
I highlighted Cardinal Health (CAH) as a Dividend Aristocrat that you might want to own in November of 2019. At the time, the company was expecting a 5% CAGR over the next 5 or so years with an outlook supported by demographic and market trends. Since then, the company has performed better than expected in terms of its business and yet the stock price is lagging the broad market recovery. Or was lagging, I should say, today’s news is helping to correct that issue.
Cardinal Health is a middleman in the healthcare market. As a distributor of pharmaceuticals and medical devices, it’s business is part of the infrastructure of American healthcare and shares the benefits of other infrastructure-related businesses. The business itself is government regulated so there is little fear of disruption other than from the political sphere; there are high barriers to entry so little fear of competition; revenue is steady and stable and the profits are predictable. All factors that add up to safe dividends and, in this case, growing dividends.
The Q3 Results Are Strong And The Outlook Is … Stable
The fiscal third-quarter results are strong and point to solid results for the year. Revenue grew 11.2% over the previous year and beat consensus by 500 basis points. Both adjusted and GAAP earnings beat as well, GAAP by $10.12 and Adj by $0.17, with GAAP earnings up 20% over the previous year. Strength was seen in both segments, Pharmaceutical and Medical, with Medical leading at +15% YoY.
The caveat is that management has offered updated guidance for the year. Management sees the COVID-19 virus pandemic having a net-negative impact to results in the current quarter, calendar 2nd/fiscal 4th quarter 2020, but reaffirmed the full-year results.
“While both segments experienced a modest net positive impact in the third quarter from increased volume related to the COVID-19 pandemic, the company expects a significant net negative impact to fourth-quarter financial results in both segments. This is driven most meaningfully by a decrease in volume related to the cancellation or deferral of elective medical procedures … The company reaffirms its fiscal year 2020 guidance range for non-GAAP diluted earnings per share attributable to Cardinal Health, Inc. of $5.20 to $5.40.”
Assuming the company is growing at the projected 5% CAGR and the 3rd quarter strength (calendar 1st 2020) was due to stock-piling/pandemic-prep, 4th quarter results could come in flat to the previous year and not negatively impact the outlook. Because the economy has begun to reopen with more than half the quarter to go, I think Cardinal could see better revenue than even they expect.
The Dividend Is As Safe As Ever
Cardinal Health is a great dividend payer an on track for Dividend Aristocrat status. The company just announced its 16th consecutive dividend increase and it is on track to increase again next year. The good news is that, even with today’s 5% pop in prices, the stock is paying a nice 3.70%. The bad news, if you want to call it that, is the new increase is only worth 1% of the payout. Not a lot but enough for now.
Looking forward, the outlook for future increases is still good. The payout ratio is low and below 40% leaving ample free-cash to service the debt. There is quite a bit of debt but it is mostly long-term in nature and well-managed. The company has loads of cash on hand and the debt-to-free-cash-flow ratio is running at a cool 4X.
The Technical Outlook: Bullish With A Chance Of Ranging
The technical outlook for Cardinal Health is bullish but there is a caveat. Although price action is moving and indicated higher, there is resistance at the top of a possible trading range to worry about. Resistance is near the $57 level which represents about an 8% rise from today’s price action. If resistance at $57 can be overcome a move to $60 and possibly higher is the next likely scenario.
5 Oil Stocks That May Not Survive the Current Crisis
What would you think of the long-term prospects of a business that paid you to buy their products? That’s an oversimplification of what occurred to the May futures contract for oil on April 20. The price for that contract sold for a negative price for the first time in history.
The crisis befalling the oil companies at this time can best be described as “only the strongest survive.” There’s just no way the oil companies can possibly handle month after month of rock-bottom oil prices.
The problem is almost comically simple to understand. There is a massively reduced demand for oil as millions of Americans are following mitigation orders ranging from social distancing guidelines to more restrictive shelter in place orders. At the same time, the market is trying to absorb the oversupply of oil that came from Russia and Saudi Arabia.
However, when the year started, things looked like it might be business as usual for oil producers. The U.S. economy was humming along and there was talk that the second half of the year might finally bring the boost to oil prices that many companies badly needed.
However, since the middle of February, the bottom has dropped out of the market in general, and oil prices have been one of the main sectors to feel the impact.
Initially, investors tried to remain optimistic. A month ago, investors thought that the economy might be reopening sooner rather than later. However, the exact timing of the reopening is about as fluid as a barrel of oil. And with it looking more likely that there will be more demand destruction at least through May, there’s very little to prop up the stock of any oil companies.
And that means that, in all likelihood, there will not be room left for some oil companies. We’ve highlighted five oil stocks that have a strong probability of not surviving the chaos surrounding the coronavirus and our nation’s response.
View the "5 Oil Stocks That May Not Survive the Current Crisis".