Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Quest Diagnostics Incorporated (NYSE:DGX) is about to trade ex-dividend in the next 2 days. You can purchase shares before the 3rd of October in order to receive the dividend, which the company will pay on the 21st of October.
Quest Diagnostics’s upcoming dividend is US$0.5 a share, following on from the last 12 months, when the company distributed a total of US$2.1 per share to shareholders. Calculating the last year’s worth of payments shows that Quest Diagnostics has a trailing yield of 2.0% on the current share price of $105.49. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Quest Diagnostics has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Quest Diagnostics paid out a comfortable 40% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 30% of its free cash flow in the past year.
It’s positive to see that Quest Diagnostics’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re not enthused to see that Quest Diagnostics’s earnings per share have remained effectively flat over the past five years. It’s better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Quest Diagnostics has delivered 18% dividend growth per year on average over the past ten years.
The Bottom Line
Is Quest Diagnostics worth buying for its dividend? While it’s not great to see that earnings per share are effectively flat over the ten-year period we checked, at least the payout ratios are low and conservative. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Curious what other investors think of Quest Diagnostics? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.