I have written extensively about this stock recently as the investor can now really avail of Cardinal Health leverage. Cardinal Health ($:CAH) is practically a dividend aristocrat having raised its pay-out for the best part of 22 years now. It has an enviable 10 year dividend growth record of 16% per year on average. The stock’s earnings multiple has now dropped to under 10 and the yield has spiked to almost 4%. The company has about 20% more interest bearing debt than equity and has earnings per share of $5.36 over the past four quarters.
These types of numbers definitely are in “value play” territory. I acknowledge that we may not see significant movement in the shares for a significant period of time. However Cardinal’s valuation and dividend warrants attention at present. Long term investors do not mind waiting for the turnaround. That really is the issue. To be a true value investor, one needs to have buckets of patience.
The firm’s Cordis segment was a prime reason for the very poor March quarter. This division may put a lag on growth over the short term. However, Cardinal has the tailwind of increased pharmaceutical spending which is the first bit of Cardinal Health leverage we can gain. Why ?
Well if we look at the chart above, we can see that the biotech complex continues to make higher highs. The Nasdaq and the semi-conductor industry have already broken out to new highs. I just don’t see the biotech sector not following suit. One just has to see the M&A activity in this area which has bounced back significantly thus far in 2018.
Now look at the long term Cardinal Health chart below. I can’t see the divergence lasting long term. Cardinal Health is a go between between the manufacturers and the retail pharmacies. If activity goes up, it stands to reason that eventually Cardinal will benefit. Presently Cardinal’s weekly slow stochastics are heavily oversold. We should get some upside traction here soon enough and it may happen on earnings.
Strong Dividend Yield Along With An Ultra-Low Pay-Out Ratio
The dividend is another tailwind that has been growing meaningfully over the past 10 years. From a free cash flow perspective, the pay-out ratio is only 22%. This means there is ample room for the dividend to grow over the long term. The best time to get compounding work in your favor is when the yield is at its highest. For example, over the past 10 years, an investment in CAH (assuming all dividends were reinvested) would have more or less doubled. Cardinal’s earnings multiple is well under 10. These are the times to be reinvesting heavily in order to reduce that cost basis aggressively. This is the second form of Cardinal Health leverage one can attain from a present investment in Cardinal Health.
Another form of leverage one could use in conjunction with Cardinal Health would be to sell options. For example, with CAH about to announce its quarterly earnings, its implied volatility is pretty high.
Covered Calls & Naked Puts Offer More Cardinal Health Leverage
One can sell naked puts or covered calls when IV is high to bring in additional income as well as the dividend. Selling options places theta decay in your favor. Furthermore in periods of heightened volatility, one could maybe sell two or three contracts in a 30 to 45 day window if profits were taken early. Again, this is form a leverage as “Good to Cancelled” closing trades can be set-up to automatically to take profits out of the market for you. Selling options is another way one can attain Cardinal Health leverage
These are three distinct ways one ca attain leverage from an investment in Cardinal Health. Whether it be a capital gain headwind, dividends or the sale of options, one can have their money consistently working for them. Combining them is true Cardinal Health leverage.