Cardinal Health's Dividend Increase Signals Resilience Amid Mixed Financials

Cardinal Health Inc (CAH) has announced a modest dividend increase, raising its quarterly payout to $0.5107 per share, effective for the April 2025 distribution. This marks a 2.14% hike from the prior $0.50 per share, maintaining the company’s streak of consistent dividend payments since at least 2020. While the increase is modest, it underscores management’s confidence in the company’s cash flow generation. However, investors must weigh this against a complex financial backdrop, including negative equity and rising operational challenges.

Dividend Sustainability: A Delicate Balance

The dividend yield currently stands at 1.17%, based on a stock price of approximately $43.50. With a payout ratio of 52.5%—calculated as dividends divided by non-GAAP net earnings—the dividend appears sustainable in the near term. This ratio is comfortably below the 60% threshold that often raises concerns about overreach. However, the payout ratio’s stability hinges on Cardinal Health’s ability to maintain its current earnings trajectory.

Financial Performance: A Story of Contrasts

Cardinal Health’s first-quarter 2025 results reveal a company navigating both opportunities and headwinds. Total revenue fell 4% to $52.3 billion, driven by the expiration of a major OptumRx customer contract. Excluding this drag, revenue jumped 15%, fueled by growth in brand and specialty pharmaceuticals. This highlights the resilience of its core Pharmaceutical and Specialty Solutions (PSS) segment, which now accounts for 92% of total revenue.

The PSS segment’s profit surged 16% to $530 million, benefiting from higher-margin specialty drugs and an earlier-than-expected rollout of a COVID-19 vaccine. Meanwhile, the Global Medical Products and Distribution (GMPD) segment faced challenges, with profits dropping to $8 million due to rising manufacturing and health-related costs.

Debt and Equity: A Structural Red Flag

While Cardinal Health’s operating performance is improving, its balance sheet remains a concern. As of March 2025, the company reported negative equity of -$1.9 billion, with total liabilities exceeding assets by the same amount. This stems from accumulated impairments, including a $675 million write-down in 2024 related to the GMPD segment.

The debt-to-equity ratio stands at -404.6%, a stark indicator of financial leverage. However, the company’s interest coverage ratio of 13.6x—calculated using EBIT of $2.4 billion—suggests it can comfortably service its $7.68 billion debt load. Cash reserves of $3.33 billion further buffer near-term liquidity risks.

Strategic Moves: Growth vs. Debt

Cardinal Health has prioritized strategic acquisitions to fuel long-term growth, such as the $1.1 billion purchase of Integrated Oncology Network (ION), which expands its oncology care capabilities. Additionally, a $375 million accelerated share repurchase program reduced shares outstanding, boosting EPS by 9% year-on-year.

Yet these moves come with trade-offs. Acquisitions add to the debt pile, and the negative equity situation remains unresolved. Management has raised 2025 non-GAAP EPS guidance to $8.05–$8.15, up from $7.55–$7.70, reflecting confidence in PSS’s growth and cost discipline.

Risks on the Horizon

1. Litigation: A U.S. Department of Justice investigation into potential Anti-Kickback Statute violations could lead to fines or operational restrictions.
2. Supply Chain: Inflationary pressures and disruptions in medical supplies continue to strain margins, particularly in the GMPD segment.
3. Equity Turnaround: Reversing the negative equity position requires sustained earnings growth or debt reduction, neither of which is guaranteed.

Conclusion: Dividend Growth Feasible, But Risks Linger

Cardinal Health’s dividend increase to $0.5107 per share is a positive signal for income investors, especially given the 52.5% payout ratio and robust operating cash flow. The company’s Pharmaceutical segment is a cash engine, and strategic moves like the ION acquisition suggest growth potential.

However, the -404.6% debt-to-equity ratio and negative equity are red flags. While the interest coverage ratio and cash reserves mitigate near-term distress, long-term stability depends on addressing these structural issues.

For now, the dividend appears sustainable, but investors must monitor equity trends and the outcome of ongoing litigation. At a 1.17% yield, CAH offers modest income appeal, but the stock’s 12-month performance (check the visual above) will hinge on whether the company can turn its balance sheet around while navigating industry headwinds.

In summary, Cardinal Health’s dividend increase is a step forward, but the path to financial resilience remains fraught with challenges.