McKesson or Cardinal Health: Which Is a Better Dividend Yield Buy?

McKesson Corporation and Cardinal Health are two of the three largest healthcare products distributors in the U.S., along with AmerisourceBergen . Cardinal Health and McKesson Corporation have similar business models, but they are very different stocks. Stocks are often separated into two camps, growth and income. Growth stocks typically focus more on growing revenue and earnings, while income stocks, which are usually more appealing to income investors such as retirees, focus on higher dividend yields. This is the case with McKesson and Cardinal Health, as well. McKesson is the more attractive stock for growth, while Cardinal Health is a high-yielding income stock. Cardinal Health is also a Dividend Aristocrat, with a significantly higher dividend yield than its counterpart. Industry Overview and Recent Events McKesson and Cardinal Health are both major pharmaceutical distributors. McKesson generates $215 billion in annual revenue and has a $22 billion market capitalization. Meanwhile, Cardinal Health generated $137 billion of revenue last fiscal year, and it has a market capitalization of $14 billion. The pharmaceutical distribution industry is broadly challenged right now, due to falling pharmaceutical drug prices. Increasing demand for generics has pushed branded pharmaceutical prices lower. Deflation across the industry has helped distributors grow total revenue through higher volumes, but at a steep cost to profit margins. As a result, earnings (and share prices) have declined for the major distributors over the past year. McKesson has fared better than Cardinal Health over the past several quarters, from the perspective of fundamentals. Over the first three quarters of the current fiscal year, adjusted earnings per share increased 8%. Revenue increased 5% in the most recent quarter. In addition, McKesson's share repurchases have helped fuel positive EPS growth. Cardinal Health has struggled more in recent periods. Adjusted EPS declined 7% in fiscal 2018. It is also off to a weak start to the fiscal 2019, with another earnings decline for the most recent quarter. Cardinal Health reported quarterly revenue of $37.7 billion, a 7% increase compared to the same quarter last year. But adjusted earnings-per-share came in at $1.29, down 15% from the same quarter a year ago. Both of its operating segments -- pharmaceutical and medical supplies -- posted 14% declines in operating profit for the quarter. Why a Return to Growth Is Likely Despite the lingering headwinds facing the U.S. pharmaceutical distribution industry, McKesson and Cardinal Health still have the potential for long-term growth. The U.S. healthcare industry is expected to continue growing at a high rate, and McKesson and Cardinal Health both hold entrenched positions in the industry. The fundamentals of the U.S. healthcare industry remain attractive. According to the Centers for Medicare & Medicaid Services (CMS), healthcare spending is expected to increase at a 5.5% annual rate over the next decade. The aging U.S. population and a very large population of Baby Boomers mean demand for healthcare products should only grow in the U.S. going forward. McKesson and Cardinal Health have significant competitive advantages to capitalize on this expected growth, in particular the scale from their massive operations. A separate positive aspect of investing in pharmaceutical distributors is that the business model is exceptionally resistant to recessions. Pharmaceutical and medical product distribution enjoys steady demand from year to year. People will always need to take their medications, even when the economy enters a downturn. Growth Vs. Income McKesson has exhibited stronger earnings growth than Cardinal Health over the past year. McKesson expects to generate adjusted EPS of $13.55 for the current fiscal year, at the midpoint of guidance. Shares trade for a P/E of 8.5x. Due to its stronger growth, its share price has fared better during the difficult period for the industry. McKesson shares have declined 17% in the past year, compared with a steeper, 23% drop for Cardinal Health. McKesson has only mild appeal from the perspective of dividends, as the stock has a current yield of just 1.4%. Meanwhile, Cardinal Health stock trades for a price-to-earnings ratio of 9.4x, based on expected earnings-per-share of $5.07 for fiscal 2019. In addition, Cardinal Health has a significantly higher dividend yield of 4%. Cardinal Health is highly attractive for income investors, as the stock yields approximately double the average dividend yield in the S&P 500 Index. Plus, Cardinal Health is a time-tested dividend growth stock, with 32 years of consecutive dividend increases. Therefore, the choice between McKesson and Cardinal Health comes down to the type of investor considering a potential investment. Growth investors should pick McKesson, as its earnings and stock price have held up better over the past year. On the other hand, income investors should pick Cardinal Health, due to its 4% yield -- more than double McKesson's yield -- as well as its status as a Dividend Aristocrat. Read more of our comparisons of dividend stocks here on Real Money Pro: Coke vs. Pepsi, AT&T and Verizon, CVS vs. Walgreens and more! Will You Have Enough Money to Retire? Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert Mr. Retirement Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.

McKesson or Cardinal Health: Which Is a Better Dividend Yield Buy?

Cardinal Health and McKesson have similar business models, but they are very different stocks.

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