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.