In the face of market volatility, many healthcare stocks and dividend-paying investments have combined to be a safe haven for investors. The safe haven theory goes like this: As inflation drives up prices, budget-conscious people focus more on needs rather than wants. Companies that supply what people need have a leg up on those that supply wants.
When looking at companies that supply what people need, Cardinal Health (CAH 2.07%) shows up on my radar. It provides products and services to fulfill health needs and that's helped the company's stock outpace the S&P 500 year to date, with likely more room to run.
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Agreements make the future clearer
Cardinal is a leading manufacturer and distributor of pharmaceuticals and medical products, serving 3.4 million patients through 60,000 pharmacies, 10,000 specialty care facilities, and 90% of U.S. hospitals.
Total annual revenue has grown steadily for seven consecutive years, at a compound annual growth rate of 8.2%. In the fiscal year that ended in June 2021, the company's total revenue was $162 billion. Of that total, $42 billion reportedly came from sales to its largest customer, CVS. That figure was reportedly a 6% year-over-year bump and would be 30% of Cardinal's pharmaceutical segment in that year.
In August 2021 the company announced it had signed an agreement to continue providing products for CVS pharmacies through 2027. Although that heavy reliance on a single customer could cause concern, investors should have confidence in knowing that the healthcare distribution market is projected to grow at a 6.7% compound annual growth rate through 2029, with Cardinal being a top company influencing that market growth. That growth should help drive revenue higher for years to come, but the company will still need cost savings to help drive earnings, and the stock price, higher.
As of this writing, year to date, the stock price has increased 12%, outperforming the S&P 500's total return of negative 9%. Some of that increase could be the result of a rebound in investor sentiment after the stock suffered during the second half of 2021 due to earnings that fell short of analyst estimates while the opioid crisis lawsuits loomed. Over the past year, Cardinal stock is down 6%.
But earnings falling short of estimates should not be new to Cardinal investors. Annual earnings have failed to meet analysts' estimate in four of the past five years. Meanwhile, revenue has topped estimates four of the past five years as the company continues to grow. The company has put a plan in place to shave off $750 million in costs. In the most recent quarter, it said it made good progress toward those savings.
In February -- along with competitors AmerisourceBergen and McKesson -- Cardinal announced another critical agreement, this one to settle most of the opioid lawsuits filed against them. In a nutshell, Cardinal Health agreed to pay up to $6 billion spread over 18 years as a result of lawsuits claiming that healthcare companies misrepresented opioids through deceptive marketing without disclosing all the risks. AmerisourceBergen and McKesson agreed to pay up to $6.1 billion and $7.4 billion, respectively. Although the settlement could impact Cardinal's bottom line for years to come, the length of time to pay off the $6 billion allows the company to continue to use cash toward growth, as well as toward dividends, rather than having to empty its coffers to pay all at once.
A biosimilar revolution enhances growth potential
Cardinal posted its third-quarter earnings this week, highlighting signs of growth with a 17% quarterly increase in pharmaceutical revenue on a year-over-year basis, supporting what the company expects to be a mid-single-digit increase in full-year profits from the pharmaceutical business. The company expects growth in that area to continue based on the company's report on biosimilars -- alternative approved versions of current drugs on the market -- which states that new entries in critical disease areas such as immunology and diabetes should give greater treatment access to patients.
In an effort to reduce prescription drug costs, Congress has passed two bipartisan bills that allow for more biosimilars to enter the market, and Cardinal should benefit if more biosimilars are being made and sold. Cardinal Health Specialty Solutions works with manufacturers of biosimilars through a drug's journey from clinical development to commercialization.
Dividends can ease growth pains
The potential for a broader customer base is worth getting excited about, but almost equally exciting for Cardinal's long-term investors is its dividends. The company has a 10-year average dividend growth rate of 9.8% and is a Dividend Aristocrat with an increased dividend for 35 consecutive years. Its dividend payout ratio of 34% of net income means the company is well positioned to continue its yearly increases as well as its investment in future growth, making it a top healthcare company for the next decade.
