2 Stocks Pulled Back +11% in a Day: Are They Bargains?

The market is full of drama. Yesterday, two stocks fell more than 11%. These are rather big drops for dividend growth stocks and warrants further investigation.

First, there’s Cardinal Health Inc (NYSE:CAH) which declined by 11.5%. It dragged down its competitors: McKesson Corporation (NYSE:MCK) and AmerisourceBergen Corp. (NYSE:ABC) by more than 4% as well.

Then, there’s W.W. Grainger Inc (NYSE:GWW) that fell 11.4%.

One I think is undervalued. The other not so much.

Why did Cardinal Health shares fall?

The company expects its earnings per share (“EPS”) for this year to come out to about $5.35 — which is the low end of its guidance.

Additionally, the company is acquiring Medtronic’s (NYSE:MDT) patient product portfolio for $6.1 billion, which is a big acquisition — coming out to a quarter of Cardinal Health’s market cap after the 11% pullback.

The acquisition will add diversification to Cardinal Health’s portfolio, and there won’t be dilution to current shareholders as the company plans to finance the acquisition with $4.5 billion in new senior unsecured notes (i.e. debt) and existing cash.

The acquisition is expected to close in Q3 (i.e. fiscal Q1) and is expected to be accretive to earnings in the first fiscal year and even more accretive after that. “By the end of fiscal 2020, the company assumes synergies will exceed $150 million annually,” as stated from the press release linked above.

It seems the acquisition will actually benefit shareholders over the long run. Still, the market generally likes to drag down the share price of the acquirer, which is Cardinal Health in this case. Adding in the EPS forecast, the shares were dragged down quite harshly.

Read More

The Best 3 Places To Look For Safe Dividend Income

If history gives a hint about the future, it indicates that companies in certain industries tend to generate stable earnings or cash flows that lead to stable dividends.

If we choose the quality companies from these industries, we can then build a diversified portfolio that generates a secure, growing income stream. Below, I list some possibilities.

Utilities: A Must-Own Sector

Earnings generated by utilities are relatively stable because people need to use electricity, gas, and water, etc. no matter if the economy is doing well or not.

One utility that came out strongly from the last recession was Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP). Since 2009 it has been a five-bagger.

Brookfield Infrastructure is a rock solid utility, which owns and operates a global, quality portfolio of infrastructure assets, including toll roads, railroads, ports, pipelines, and telecom towers.

Its trusted management, Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM), employs value investing and actively recycles mature assets for higher returns. Because management owns 30% of the partnership, retail unitholders can expect the management to be unitholder-friendly.

Indeed, Brookfield Infrastructure has increased its distribution every year since 2009. Going forward, it gives the guidance to grow its distribution by 5-9% per year. Currently, it offers a yield of 4.5% to start.

Read More

Retirees: How To Protect The Principal Of Your Dividend Portfolio

There are various things retirees can do to protect the principal of their dividend portfolios. At the stock level, retirees can buy quality businesses with a minimum credit rating of BBB, a strong moat, and a long history of profitability at a margin of safety. Retirees should also ensure their portfolios are sufficiently diversified and build a cash reserve to sail smoothly through market downturns.

Investment-grade rating

Looking at a company’s credit rating is one factor of quality that can be easily checked.

Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings. – Investopedia

A company rated as BBB or higher by Standard & Poor’s or Moody’s is considered investment grade. The higher the rating, the higher the quality. Retirees can add a layer of safety by investing in stocks that have a credit rating of BBB+ or higher.

Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (NASDAQ:MSFT) are both awarded the strongest S&P credit rating of AAA.

Earnings or cash flow stability

Depending on the type of the company, you would want to look at its earnings or cash flow history to see how stable its profitability is and if the company tends to grow its profitability over the long run.

Read More