Cardinal Health(CAH) - Get Report is not what you'd typicallythink of when you think of a Dividend Aristocrat, a stock with 25 or more years of consecutive dividend increases. 

Names such as Procter & Gamble(PG) - Get Report , Coca-Cola(KO) - Get Report , Johnson & Johnson(JNJ) - Get Report and 3M(MMM) - Get Report are what most investors think of when they think of Dividend Aristocrats or high-quality dividend growth stocks. But Cardinal Health is the best Dividend Aristocrat to buy into today. (You can see all 50 Dividend Aristocrats here.)

Procter & Gamble is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells PG? Learn more now.

First, the company has a strong and durable competitive advantage. Second, Cardinal Health has excellent growth prospects due to favorable macroeconomic trends. Third, the company trades for a low forward price-to-earnings ratio of just 13. Investors looking for market-beating total returns should consider Cardinal Health.

Let's take a closer look at this compelling investment opportunity. 

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1. Cardinal Health's Competitive Advantage

Cardinal Health operates in the generic pharmaceutical and medical supply industry. The industry is dominated by just three players:

  • McKesson Corporation
  • AmerisourceBergen
  • Cardinal Health 

This immediately tells us that to compete successfully in this industry a company must realize economies of scale. Margins are razor thin in the generic pharmaceutical distribution industry. All three of the large players in this industry have profit margins of only 1.2%. Smaller companies that have not realized economies of scale simply cannot compete. This reduces new entrants to the market and helps protect Cardinal Health from additional competition.

Cardinal Health's supply chain has realized tremendous scale. The company services more than 100,000 health care locations daily. Cardinal Health has generated $121.55 billion in sales over the last 12 months; it is a tremendously large operation.

Generic pharmaceutical distribution is a commodity service at its core. It isn't reliant on a specific technology or drug. This makes it very likely that the generic pharmaceutical industry in general and Cardinal Health in particular will be around (and growing) for a long time.

2. Growth Prospects

Here are the favorable macroeconomic trends that will propel Cardinal Health's growth:

    An aging population in the U.S.

    Increasing pharmaceutical usage in the U.S.

    The greater the demand for total pharmaceutical products, the larger Cardinal Health's business can become.

    And that's good news, because the U.S. is consuming more and more pharmaceuticals. Around 60% of Americans take pharmaceuticals, and around 15% take more than five prescriptions a day.

    What's more, the U.S. population is aging. Americans who are 65 or older currently make up 14.2% of the population. By 2040, that percentage is expected to rise to 21.7%. Seniors (aged 65-plus) have on average more than twice the number of prescriptions as adults aged 19 to 64.

    Demographic trends tell us that there are going to be a lot more pharmaceuticals in the U.S. in coming years. And Cardinal Health will benefit from this trend by distributing these pharmaceuticals.

    These trends point to excellent growth going forward for Cardinal Health. The company saw revenue surge 14% in its latest quarter. Adjusted earnings per share grew even faster at 20%. The company's guidance calls for 5% to 9% adjusted EPS growth in the next fiscal year, which will likely prove to be a very conservative estimate. Overall, Cardinal Health should grow EPS by 10% or more a year over the next several years.

    In today's inflated market, you would expect a company with solid growth prospects and a strong competitive advantage to trade for a high price-to-earnings ratio. But that's not the case with Cardinal Health.

    3. Cardinal Health Is a Bargain

    Cardinal Health is currently trading for a forward price-to-earnings ratio of 13. The company's low forward price-to-earnings ratio does not reflect its growth prospects or competitive advantage.

    Think about it like this. Cardinal Health is expected to grow faster than the overall market. It has a dividend yield of 2.1%, which is about equal to the S&P 500. The company has a strong and durable competitive advantage that is more robust than the "average" S&P 500 stock.

    All of this points to Cardinal Health commanding a premium valuation. And yet its forward P/E ratio of 13.3 is well below the S&P 500's forward price to earnings ratio of 18.6.

    Cardinal Health is exactly the type of business The 8 Rules of Dividend Investing is built to find. It is a undervalued dividend growth stocks with a shareholder friendly management and a strong and durable competitive advantage.

    This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.