Not far ago I wrote a post Cardinal Health – give it a time!. Today shares are traded above $83. Look at that. Year to date shares are up by 16%. Since bottom in November ($65) shares are up almost 30%. I bought at $68.5 at the end of October and my profit is more than 20% in short time. Well, isn’t it going up too fast? Should I take profit and forget?

First of all let’s look from macro perspective. There are doubts recently about Walgreens acquisition of Rite Aid – will it finally happen? This deal would merge two giant players and probably it would be bad for CAH. Oh really? In fact I think that there are also potential benefits of this merger. First of all in case of some disinvestments by WBA (there might be such condition) there is an opportunity for CAH to buy some assets in good prices. Secondly and even more important – is potential merger a chance that risk of war prices is gone? Probably yes. So why when risk of not finishing deal increases we can see that CAH shares are going up so much?

How about drug prices in US? It was a hot topic during elections, and Trump is good for healthcare. For sure? Well, for me it is still a huge risk.

Then financial results were weak, but better than expectations. How about valuation?

EV/EBITDA = 9.3

P/E = 15.4

Dividend yield = 2.1%, from historical perspective it is still not bad, but not a special offer.

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Well, probably you remember that I like buying when I see Dividend Aristocrat with stable payout and historically high dividend yield. This worked perfectly here. The assumption is that sooner or later dividend yield should come back to some average level. So when you buy with high yield it is probable that share is too low versus dividend (at least in short term).

Look also that shares are coming to all-time highs! This is definitely not a level at which I would buy, so should I sell?

Well here again let’s look on dividend yield. It can be lower like 1.5%. To this point there is upside of around 25% – I do not believe in it! But as dividend grows also share price potential is increasing. For me valuation is neutral / is getting high, dividend yield is neutral. I will keep my shares a little bit longer but I see that at around $88 is my take profit level. Sooner or later some bad news regarding drug prices will come to the market.

 

Disclaimer: CAH – long