Cardinal Health: Navigating Growth and Dividends in a Challenging Healthcare Landscape

Cardinal Health (CAH) has emerged as a pivotal player in healthcare distribution and specialty solutions, but its fiscal 2025 results and strategic moves reveal both promise and pitfalls. With sector-wide pressures on margins and regulatory headwinds, investors must weigh its growth initiatives against its financial structure to assess whether its dividend resilience and long-term prospects are sustainable.

Key Financial Highlights: Growth Amid Challenges

Cardinal Health's third-quarter fiscal 2025 results underscore its ability to navigate a complex environment. While reported revenue remained flat at $54.9 billion versus fiscal 2024, adjusted revenue (excluding a major contract expiration) surged 19%, signaling underlying strength. Non-GAAP diluted EPS rose 13% to $2.35, prompting the company to raise its full-year 2025 guidance to $8.15–$8.20, with a 12%–14% CAGR target through 2028.

The company's free cash flow hit $3.25 billion in fiscal 2024, a 38% year-over-year increase, fueling shareholder returns. Management has boosted its annual share repurchase program to $750 million and maintained a 1.26% dividend yield, supported by a conservative 31.84% payout ratio. This suggests dividend resilience, even as the sector faces headwinds.

Strategic Initiatives: Targeting High-Growth Segments

Cardinal Health's growth hinges on its strategic pivot toward high-margin segments:

1. Pharmaceutical and Specialty Solutions (PSS):
2. The PSS segment, which now includes the GI Alliance and Urology America platforms, reported a 14% profit increase to $662 million. Expansion into urology and oncology (via the Specialty Alliance) positions CAH to capture rising demand for specialty drugs and at-home care.

3. The acquisition of Advanced Diabetes Supply Group adds scale to its at-Home Solutions division, which now serves 2,200 providers across 28 states.

4. Automation and Operational Efficiency:

5. The Consumer Health Logistics Center (CHLC), fully operational since July 2025, and plans for three new automated distribution centers aim to cut costs and improve margins.

6. The Vantus HQ platform, now used by 1,000 retail pharmacies, enhances order accuracy and reporting, boosting customer retention.

7. Advocacy and Ecosystem Resilience:

8. The One Voice Initiative advocates for independent pharmacies, addressing reimbursement and regulatory issues. This indirectly stabilizes demand for CAH's PSS offerings, which serve these pharmacies.

Sector Challenges: Margins, Equity, and Regulation

Despite these positives, Cardinal Health's financial structure raises red flags:

• Thin Margins: Operating margins remain a meager 0.55% (fiscal 2024), reflecting the capital-intensive nature of healthcare distribution and pricing pressures.
• Negative Equity: Stockholders' equity dipped to -3.21 billion, likely due to accounting adjustments, but this could limit flexibility during downturns.
• Regulatory Risks: Ongoing DOJ investigations into potential Anti-Kickback Statute violations pose reputational and financial risks.

Dividend Resilience: Sustainable or Overstretched?

Cardinal Health's dividend appears safe in the near term. With a $3.25 billion free cash flow in fiscal 2024 and plans for $10 billion over three years, the company can fund its $750 million annual buybacks and dividends. The 31.84% payout ratio leaves ample room for reinvestment. However, investors must monitor whether margins improve—0.55% is unsustainable long-term—and if operational efficiencies offset sector challenges.

Investment Considerations

• Upside Drivers:
• Successful execution of the CHLC and automated centers could lift margins.
• High-margin segments (PSS, nuclear theranostics) may deliver the 12%–14% EPS CAGR target.

• The One Voice Initiative strengthens pharmacy partnerships, reducing demand volatility.

• Downside Risks:

• Slower specialty drug adoption or supply chain disruptions could hurt revenue growth.

• Negative equity and thin margins may deter investors during macroeconomic shocks.

• Valuation:

• Cardinal Health's P/E ratio of 25.15x (fiscal 2025) is rich compared to peers, but it narrows to 16.92x by 2026 if guidance holds. Investors should wait for post-earnings clarity on August 12, 2025, before scaling up exposure.

Conclusion: Hold for Dividends, Monitor Growth Execution

Cardinal Health's strong free cash flow and dividend resilience make it a viable holding for income investors, but growth investors must remain cautious. While its strategic moves in specialty solutions and automation are promising, margin expansion and regulatory clarity are critical to long-term success.

Recommendation:
- Hold for dividends, leveraging the 1.26% yield and stable payout ratio.
- Wait for August 2025 earnings to confirm whether the $8.20 EPS target is achievable before increasing exposure.
- Avoid if sector-wide margin pressures or regulatory penalties materialize.

In a sector rife with challenges, Cardinal Health's strengths lie in its liquidity and growth initiatives—but its success hinges on translating these into sustainable profitability.