McKesson Corp, Walgreens Boots Alliance, Cardinal Health Corp., CVS Health Corp: Medical Distributor


This is a follow-up to my first article in a continuing series where I will be identifying and presenting dividend growth stocks for an above-average long-term total return objective. My first article in this series covered AmerisourceBergen, a leading medical distributor that I presented as significantly undervalued. However, I offer this follow-up to illustrate that the entire sector and subsector is currently out-of-favor and undervalued. Consequently, this represents a case that is more sector-related than company-specific.

Most importantly, the primary issues causing concern throughout this sector are politically related. There are also concerns about lawsuits related to the opium epidemic. However, these issues are based on fears about things that might happen but have not yet happened. Consequently, the future fundamentals for each of these companies are currently expected to remain positive going forward. As a result, and based on those fundamental future expectations, the stocks would be considered extremely cheap offering above-average upside. Therefore, as long as earnings do in fact continue to manifest, that would be a true statement.

On the other hand, if the future does bring significant health care reform to include limits and restrictions on pharmaceutical prices, the future earnings and cash flows of these companies could change negatively. Therefore, prospective investors should be aware of these risks but at the same time recognize that these risks may already be priced in. Nevertheless, it’s up to each individual investor to decide for themselves whether they are willing to take that risk or not.

Sources of Long-Term Return

Throughout this series, I will be illustrating that there are several prudent sources of long-term return and there is also luck or chance. Personally, I suggest that investors strive to build their portfolios based on prudent fundamental realities and not simply invest with the hope that your stocks will rise.

The primary prudent sources of total return that I am alluding to are, first and foremost, sound fundamental valuation – although attractive undervaluation is even more desirable. The second primary source would be growth defined as the potential long-term rate of change of earnings and/or cash flow growth and dividend growth. When you invest at sound valuation, you position yourself to participate in the growth that the business generates on your behalf.