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Is Quest Diagnostics a Great Dividend Stock?

To me, a great dividend stock means an investment that pays a good yield today and is likely to increase it going forward, with payouts that are stable and safe for the foreseeable future. Without all of those factors, it's hard to consider a dividend great. What we're looking for are reliable, income-producing stocks that you can buy and forget about.

Today, I'll look at whether diagnostics and testing company Quest Diagnostics (NYSE: DGX) falls into that category of a safe dividend stock. I'll take a look at its recent performance to see whether it's worth putting the stock into your portfolio today, or if you're better off looking elsewhere for a quality dividend stock.

Where the dividend is today

Quest currently pays its shareholders a quarterly dividend of $0.56. Annually, that means investors are making $2.24 for each share that they own. With Quest's share price at about $118, that puts its yield at 1.9%. That's right near the 2% average for an S&P 500 stock. That yield is neither under- nor overwhelming, meaning that for the stock to be a great dividend investment, it'll need to do much better in the next section: dividend growth.

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Quest's dividend is growing, but the company isn't an Aristocrat

To be a Dividend Aristocrat, a company needs to raise its dividend payouts for at least 25 years in a row. Quest's nowhere near that mark, though it has notched increases every year since 2012 (the company has been in business since the '60s). And unlike your typical dividend growth stock, the company's rate hikes aren't happening at the same time every year -- they're much more inconsistent.

Beyond all that, iut's also important to note the rate at which management is increasing the dividend. Five years ago, Quest was paying its shareholders $0.38 every quarter. The payouts have grown by 47.4% since then, averaging a compounded annual growth rate of 8.1%. Its most recent rate hike, however, was an increase of $0.03, or 5.7%. And with the COVID-19 pandemic adversely affecting the economy and Quest's possible earnings, future rate increases may be even lower. In order to assess that, let's take a look at the New Jersey-based company's recent financial results and how strong its dividend is amid the pandemic.

Are the payouts safe?

On July 23, Quest released its second quarter results for the period ending June 30, with sales of $1.8 billion declinibng by 6.4% year over year. Its diluted per-share earnings of $1.36 also fell 9.7% from the prior-year period.

Hospitals began delaying elective surgeries and non-urgent care during the pandemic, leading to a decline in demand for Quest's testing services. But performance was still better than management expected -- they noted on the earnings call that hospitals were getting back to their normal day-to-day operations quicker than they'd feared.

Meanwhile, Quest has been performing COVID-19 tests by the millions -- more than 2.5 million antibody or serology tests and 8.5 million molecular diagnostic tests as of the date of the earnings release. And that number is likely to rise, with management saying on the earnings call that Quest will have the capacity within a "couple of weeks" (which would be sometime in August) to conduct 150,000 molecular diagnostics tests daily, up from its 130,000 at the time.

Some optimism for Quest moving forward does not seem unwarranted. In the third quarter, if no major shutdowns recur to keep people at home, some sort of normalcy could return to hospitals -- and to testing companies like Quest. In the second quarter, the company generated $273 million in free cash flow, well above the $75 million it paid out in dividends during the period, so the dividend certainly looks to be safe. There's even room for it to continue to rise, especially if future quarters show improvement.

No, Quest isn't a great dividend stock

All that said: Quest's dividend falls short of the ideal in multiple areas, and it would be a stretch for investors to consider it "great." The biggest obstacle is that the yield is just too small, at less than 2%.

Even if Quest were to increase its dividend every year at a rate of 8%, it would take nine years for those payouts to double to 4%. There are plenty of dividend stocks that pay 4% today -- who knows where they'll be in a decade? The company also doesn't have a long track record of increasing its dividend payments, which could make it easier to cut or suspend the payouts, especially if things do get tougher during the pandemic. 

Year to date, shares of Quest are up 11%, outperforming the S&P 500's 8% returns thus far. Overall, it's a good healthcare stock to invest in, especially as hospitals return to non-emergency procedures. But if you're looking for a great dividend stock to put into your portfolio, you're better off looking elsewhere.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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