Pharmaceutical and medical device distributor Cardinal Health (CAH) essentially acts as a middleman between big pharma and the pharmacies and hospitals that provide drugs to patients. That's great business if you can get it -- but it also comes with little in the way of an economic moat. If either side of the deal (pharmaceuticals, medical supply makers, or major pharmacies) decide that profitability looks too attractive for firms like CAH, they can always opt to fulfill that role in-house. That's a risk investors should be aware of.
Cardinal's biggest advantage lies in its scale. Because Cardinal is combining the distribution efforts of some of the biggest players in the industry, the company can cut costs more than any single name could likely do on its own. That keeps CAH relevant, but it also keeps margins paper-thin.Financially, Cardinal is in very good shape, with a small net-cash position and extremely consistent sales numbers. The firm's 10.5% dividend hike on Wednesday ratchets its quarterly payout to 24 cents per share, a 2.19% yield. If you had to pick a single health care name to buy today, I'd recommend buying Johnson & Johnson over Cardinal Health. Cardinal was one of 8 UBS Stock Picks for 2012.
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