A lot has to happen for patients to get the prescription drugs they need, and Cardinal Health (CAH 2.80%) plays a key role in the healthcare industry. As a drug wholesaler, Cardinal Health distributes pharmaceuticals to a wide range of pharmacies, hospitals, and other healthcare facilities. The company also provides a variety of other medical products for its professional and consumer customers. Along the way, Cardinal Health has been able to reward its shareholders with steadily increasing dividends. Yet with new pressure on the drug distribution front, some investors fear that Cardinal could face greater challenges in the future. Let's take a closer look at Cardinal Health to see whether investors can be confident in its ability to keep its dividend moving higher.
Dividend stats on Cardinal Health
|
Current Quarterly Dividend Per Share |
$0.4624 |
|
Current Yield |
2.7% |
|
Number of Consecutive Years With Dividend Increases |
21 years |
|
Payout Ratio |
45% |
|
Last Increase |
June 2017 |
Data source: Yahoo! Finance. Last increase refers to ex-dividend date.
Dividend yield
Cardinal Health currently sports a dividend yield of about 2.7%. That's above the roughly 2% average dividend yield for the stock market as a whole, but it's not so extraordinarily high that it raises red flags for being too aggressive. Cardinal's yield is at the high end of what investors are used to seeing, with the yield having been in a slightly lower range of between 1.5% and 2.5% throughout most of the past decade. A combination of stagnant share prices and dividend growth has been the primary cause for the yield increase, and the move hasn't been so extreme as to raise major concerns at this point.
Image source: Cardinal Health.
Payout ratio
Cardinal Health's current payout ratio of 45% reflects the company's conservative attitude toward dividend payments. If anything, the current amount is actually higher than it has been in the past, with Cardinal often sporting payout ratios in the 30% to 40% range during the 2010s. Current projections for near-term earnings growth imply that if the company rebounds the way that investors expect, the payout ratio should fall back to its 30% to 40% level within the next couple of years.
Dividend growth
Cardinal Health has been committed to growing its dividend, having made payout increases for 21 straight years. From year to year, Cardinal has generally been generous in how much it has grown its dividend, but the most recent boost slowed to just a 3% rise. Investors nevertheless should be pleased with the company's willingness to keep its dividend moving higher even as it faces new uncertainty about a core piece of its overall business model.
CAH Dividend data by YCharts.
What's happened with Cardinal Health lately?
The main threat that Cardinal Health and its peers have faced lately has to do with the changing perception of the pharmaceutical industry by the federal government. Healthcare costs have risen at a faster pace than the prices of most other goods and services, and prescription drug costs in particular have played a key role in the rate of that cost rise. Lawmakers on Capitol Hill have started looking at who's responsible for drug pricing and how they might be able to limit future price increases to make drugs more affordable. As drug manufacturers respond to this pricing pressure, their arrangements with Cardinal and its peers result in less revenue, causing Cardinal's numbers to take a hit.
The question still outstanding is whether Cardinal Health and other drug distributors will end up taking the brunt of any reform efforts. If price increases slow, then Cardinal will need to explore different ways to get compensated for its work. Whether drug makers will be willing to negotiate remains to be seen, but if the overall prescription drug pie starts to shrink, then investors need to be prepared for much more difficult discussions in the future.
What to expect from Cardinal Health
Cardinal Health's dividend is safe, even though the company is facing some difficult industry conditions right now. With a good margin of safety and a long streak of dividend increases to protect, shareholders can expect Cardinal Health to do everything it can to preserve and grow its dividend in the future.
