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Will Cardinal Health Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

When people think about pharmaceuticals, they tend to focus on the companies that develop and produce them. But once you have a blockbuster drug, you still have to get it to market. That's where Cardinal Health (NYSE: CAH  ) comes in, working to distribute drugs on a wholesale level to health-care facilities and drugstores around the nation. But with health-care reform set to take effect, the industry is going through an upheaval. What will happen with Cardinal? Below, we'll take a look at how Cardinal Health does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But, as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Cardinal Health.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$13.9 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.73

Pass

 

Worst loss in past five years no greater than 20%

(39.6%)

Fail

Valuation

Normalized P/E < 18

12.64

Pass

Dividends

Current yield > 2%

2.3%

Pass

 

5-year dividend growth > 10%

17.7%

Pass

 

Streak of dividend increases >= 10 years

24 years

Pass

 

Payout ratio < 75%

28.1%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Cardinal Health last year, the company has kept its eight-point score. But the stock has fought just to stay close to even, posting a very slight loss over the past year.

Cardinal Health is a giant in the drug distribution business. With peers McKesson (NYSE: MCK  ) and AmerisourceBergen (NYSE: ABC  ) , Cardinal is part of a triumvirate that provides the vast majority of pharmaceuticals to hospitals and nursing homes, as well as drugstores and other retail outlets.

Despite concerns, Cardinal may actually benefit from domestic health-care reform. Cardinal and its peers enjoy better profit margins on generics than on branded drugs, and so the emphasis on generics for cost-cutting purposes could help the company.

But Cardinal has faced some challenges from changing conditions on the retail front. Specifically, it lost out to AmerisourceBergen when Express Scripts (Nasdaq: ESRX  ) revisited its distribution arrangement after its takeover of Medco. Now, Walgreen (NYSE: WAG  ) has made a similar request, and with their agreement expiring in less than a year, investors have to worry about a potential one-two punch if it loses that business, as well.

Given the uncertainties in the U.S. market, Cardinal has tried to expand overseas. It has made a couple of forays into China, buying a drug distributor and opening a logistics center in Shanghai. With the Chinese drug distribution system somewhat in disarray, Cardinal has an opportunity to take advantage of the $100-billion-plus industry.

For retirees and other conservative investors, Cardinal's recent addition to the Dividend Aristocrats list is an obvious draw. With cheap valuations and impressive growth, Cardinal seems like a natural for many investors seeking to add health-care exposure to their retirement portfolios.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Cardinal Health to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts and McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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ABC $76.79 Up +0.42 +0.55%
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