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Questcor Dividend: Like It or Loathe It?

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Congratulations! Maybe.

If you owned shares in Questcor Pharmaceuticals (Nasdaq: QCOR  ) before Oct. 29, you have good news. You will be the recipient of the biotech's first-ever dividend payment. Twenty cents per share should be headed your way in the next few weeks.

As any longtime follower of The Motley Fool knows, we really like dividends. But to be honest, we discriminate in our infatuation over dividends. There are some dividends we just don't like very much. Since Questcor's dividend is brand-spanking new, let's look at whether this is the kind of dividend that Fools should like or loathe.

Like or loathe?
The dividends we like the most meet a couple of basic criteria. First, they are significant. Second, they are stable.

By significant, I'm referring to the size of the dividend yield. In Questcor's case, the dividend payout of $0.20 per share translates to a yield of 3.1% based on the stock's current price. That's not too shabby -- especially for health care. Only 33 health-care companies can currently boast dividend yields of 3% or more.

PDL BioPharma (Nasdaq: PDLI  ) ranks as one of the top health-care dividend stocks with a yield of 7.4%. PDL stands as somewhat of an anomaly, though. Most in the top group of 33 fall closer to Pfizer (NYSE: PFE  ) , which has a yield of 3.5%.

More important, though, is the stability of the dividend payout. We can look at stability from several vantage points.

One is to evaluate how long the company has consistently paid dividends. For example, Abbott Labs (NYSE: ABT  ) pays the same 3.1% yield as Questcor. But while Questcor is only beginning to pay a dividend, Abbott has paid dividends in every quarter since 1924.

Another way to look at stability is to determine the company's dividend payout ratio. This ratio is simply the percentage of net income paid out through dividends. The lower this ratio is, the better the company should be able to sustain paying out dividends.

We have to do a quick calculation for Questcor, since it hasn't actually paid out the dividend. If we divide the declared dividend of $0.20 per share by the net income from third quarter of $0.91 per share, the company's payout ratio totals 22%. That level looks quite attractive, especially when you consider that Abbott's ratio is 48%.

Are we ready to say conclusively that Questcor's dividend is one that Fools should really like? Well, not quite.

Beyond the numbers
There is more to the stability factor than merely a calculation. Just because a company can easily pay a dividend today, that doesn't mean it can continue to do so in the future. That's where we run into some questions with respect to Questcor.

The most serious question relates to reimbursement. Aetna (NYSE: AET  ) changed its policy in September to no longer cover Questcor's Acthar gel for use in treating multiple sclerosis. If other insurers follow suit, Questcor's earnings will possibly be slashed to the point that it can no longer pay dividends.

However, the nation's largest health insurer, UnitedHealth Group (NYSE: UNH  ) , issued a policy update recently that made minor changes but confirmed its coverage for Acthar. This action could lessen the risk that others will make as drastic of a move as Aetna did.

Another dimension of stability is the stock's price. Even if a company pays a high dividend, that doesn't help much if the stock drops by a larger percentage than the dividend yield.

Questcor's stock has been highly volatile in 2012, with several swings of 20% or more. This volatility presents a concern for investors.

Fool in love?
To really love a dividend, Fools want to see a high yield, a long history of consistent payments, a strong and stable company, and a stock that isn't too volatile. Questcor doesn't check off all of those boxes. 

That doesn't mean Questcor doesn't present an opportunity, though. The bigger potential for this stock is in its potential growth -- assuming, of course, that insurers align more with UnitedHealth than they do with Aetna.

And despite not meeting all of our criteria, Questcor's dividend isn't one to loathe. I just wouldn't recommend buying the stock as a "dividend stock." Look at Questcor as a growth stock with a nice dividend yield as icing on the cake. Barring any big adverse reimbursement decisions, big congratulations could be in order for Questcor shareholders down the road.

If you're looking for dividends to love, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services recommend PDL BioPharma and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2012, at 11:43 AM, jimlong3rd wrote:

    Keith, Aetna did not lock the door and throw the key away relative to reimbursing for Acthar for other than IS. Sometimes what is not stated is more important than what is stated. Aetna did not preclude evaluating a case-by-case reimbursement for the use of Acthar for other than IS. Therefore, I see the door as still open to discussions and advantageous decisions for QCOR. The Aetna issue is super over-blown and is being given too much weight. By doing this Aetna is portrayed as bungling buffoons, which they are not. They are evaluators of risk and if a patient is allowed to die because of some callous policy then Aetna is open to a lawsuit, valid or not, the attorneys who have lined up to sue QCOR will also be there for the decedent’s family. Also, Aetna is aware of the cost of hospital/nursing home stays and will not for one minute withhold paying for Acthar if it can be shown to have the higher probability of being the least costly. Lastly, on this issue, United HealthCare is not the only insurer that continues to evaluate case-by-case reimbursement of Acthar. This is the way QCOR has being doing business for years. A minor tweak in Aetna's language has been blown totally out of proportion.

    As for the dividend, you mentioned that the first one is being paid Nov. 15. Until that is paid, there is not history. Until the second one is paid there is no repetition upon which a track record is developed. It seems that the 1st dividend must be compared with 24 years of payment by Abbott. I am unable to stretch an analogical link with this info.

    One must not forget that Citron's Andrew Left is a convicted felon whose opinions and misappropriation of facts is in some ways responsible for the manner in which you wrote your report. If he were absent, would you have not written differently? I think so!

  • Report this Comment On November 01, 2012, at 3:50 PM, TMFFishBiz wrote:

    My primary point about Aetna focuses more on whether or not other insurers will restrict coverage of Acthar. If they do, it definitely would hurt Questcor's ability to pay (and/or increase) dividends in the future.

    Regarding UNH, I totally agree with your viewpoint. The company's changes were minor and won't impact QCOR much at all in my opinion. That's why I mentioned that if other insurers remain lined up more with UNH's stance, QCOR should be fine on that front.

    You're right that it's hard to compare a company with no history of paying a dividend against one that has paid a dividend since Calvin Coolidge was president! The point I intended was that dividend-oriented investors prefer companies with long track records of consistent dividends. QCOR doesn't have that yet. That's not bad, it just doesn't check off the box that ideal dividend stocks would have.

    Would I have written the article differently if Andrew Left had not stirred things up? My response is that I certainly would have raised the Aetna change as a potential issue regardless of Left's influence, especially if the market reacted as it did to the news. I would have been negligent if I did otherwise.

    But, to your point, the market might not have reacted as strongly without Left's influence. And, if the market had not reacted as strongly, the issue would not have seemed as significant. So, I'll venture to say that the article could have been different in an alternate universe without Andrew Left. I'll leave it to others to speculate if that is a preferable universe!

    Thanks for reading and taking the time to comment!



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