I was thinking about buying Cardinal Health for quite a long time. On Friday, in my opinion, opportunity has come. Unfortunately I am not staring all day on share prices and I was not able to pick CAH shares at a good price like 65-66 (not mentioning 63.xx). Nevertheless over the weekend I saw in my docs that price is still attractive, well below my investable level, so I decided to buy 30 shares on Monday opening at 68.53.

Why I did that?

Well, first of all valuation is not demanding. Today company presented results for Q1 FY 2017, where is a guidance $5.40 to $5.60. It means P/E ratio is around 12.4 – definitely not bad as for high quality Dividend Aristocrat. Share is down 25% from the peak and -20% year-to-date.

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As it comes to dividend yield it is around 2.6-2.7%. Let’s look on historical yields:

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It could have been better, but still it is a very good result.

Market cap is around $20b, net debt is $3b, so not a lot. Last year dividend + buyback = $1.2b, so 6% return to shareholders. Not bad.

Investors are currently worried about margins in pharmaceutical distribution sector. Well, after last McKesson statement about potential price war situation doesn’t look good. Also there is a risk that drugs prices will be significantly cut in the future. On the other hand market is oligopolistic with only 3 players: McKesson, Cardinal Health and AmerisourceBergen – I would not assume that they will really compete so strong that profits in sector will be drastically reduced. Maybe it was just a signal/warning?

Also remember that there is Medical segment in CAH, which generates around 15% of profit, with higher margin.

 

Summing up, I like risk to reward ratio in this investment. Surely, if competition increase then there is a risk for guidance/earnings, but for now I think that valuation is occasional. Also sentiment is really bad and I see some space for improvement. We will see.

 

Disclaimer: CAH – long