Cardinal Health (NYSE:CAH) shares took a beating yesterday, plunging 6.7% after the provider of drug distribution and development services revealed that the next fiscal year's earnings growth will be lower than expected. Still, not all the news was disappointing. Cardinal also revealed that it's entering a new phase, with a long-term picture that's far from grim.

Cardinal explained that 2005 earnings for this fiscal year, ending June 30, will hit the upper end of its $3.10 to $3.20 per-share projection. However, for 2006, the firm warned that per-share earnings would land between $3.30 and $3.55, well below the analysts' consensus estimates of $3.74.

The main culprit is the company's primary business, drug distribution. While Cardinal has achieved some success in rebuilding its operating model in this area, most notably through a contract with Eli Lilly (NYSE:LLY), operating margins are expected to fall slightly year-over-year, and the company is unsure when it will be able to reach its long-term goal of operating margins greater than 2%.

The other factors expected to drag on 2006 earnings seem less serious. Cardinal's pharmaceutical technologies and services (PTS) and clinical technologies and services (CTS) units will see less-than-anticipated growth due to a slower-than-projected recovery in fiscal 2005, although both are still projected to grow substantially. The final item expected to dampen 2006 earnings is increased investment, which the firm believes will add to operating earnings from 2007 on.

In the final analysis, Cardinal remains a solid company, since the company still anticipates 12-15% earnings growth over the long term. However, there has definitely been a change in strategy. Cardinal is taking a breather from acquisitions to focus on returning cash to shareholders with dividends and stock buybacks. For fiscal 2006 alone, Cardinal is doubling its dividend to $0.24 per share, and the company has authorized a $1 billion share repurchase program.

The long-term goal is to return 50% of operating cash flow to shareholders. Given that Cardinal's cash flow from operations for the first nine months of this fiscal year already amounts to more than $2 billion, the company's move can only be a welcome development for investors.

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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not have any financial position in any companies mentioned in this article.