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Is Quest Diagnostics Stock a Buy?

By David Jagielski - Updated Jan 21, 2020 at 1:47PM

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The company is coming off a strong third quarter, and investors can expect to see its year-end results toward the end of this month.

Quest Diagnostics (DGX -0.73%) is a leading global diagnostics company and an attractive option for those who want a safer way to invest in the healthcare industry. With a market cap of around $14 billion, it isn't the largest healthcare company. But it has made a name for itself working with many big organizations over the years, currently serving about half of the hospitals and doctors in the U.S.

Over the past 12 months, the stock has risen 24%, slightly underperforming the S&P 500's returns of 26% during that time. But with Quest's share price up around 52-week highs, it may be an expensive stock to own today. Let's take a closer look to see whether it's still a good buy or if investors should wait for a dip in its share price.

Good results, but growth is hard to come by

In October, Quest released its third-quarter results, which beat expectations for both sales and profits. In addition, the company also raised its outlook for the remainder of the year. Quest is expecting its top line to come in at $7.72 billion for the full year. While that's higher than the midpoint of its previous range, it would be just 2.5% higher than 2018's tally of $7.53 billion in revenue. 

A doctor reviewing results with a patient using a tablet

Image source: Getty Images.

Although Quest lost exclusivity with Aetna in 2019, it has since become a preferred provider for UnitedHealth, which has allowed it to produce some better-than-expected results. The company noted that having greater access has been key to its improved performance this year.

While Quest has an excellent presence in the market today, finding more growth may be a challenge. In recent years, the company hasn't shown much growth, with its revenue fluctuating between $7.5 billion and $7.7 billion since 2016. Profits have also been volatile during that time, ranging between $645 million and $772 million.

For a growth investor, it may be difficult to get excited about investing in Quest given the lack of progress in the company's top line.

Does the dividend sweeten the deal?

Currently, Quest pays its shareholders a quarterly dividend of $0.53, which comes out to an annual yield of 1.99%. That's slightly better than the average 1.85% investors can earn with the S&P 500. But without the same level of diversification that the index offers and growth prospects not looking any stronger, convincing investors that Quest is the better dividend option will be no easy task.

The good news is that investors who hang on to shares of Quest for a long time could see their payouts rise. Five years ago, the company was paying its shareholders a dividend of $0.33 every quarter. Quest has hiked its payouts by more than 60% since then, averaging a compounded annual growth rate of 9.9% during that time. If Quest were to continue raising its dividend payments at that rate, investors would see their dividend payments double after a little more than seven years of holding onto the shares.

Why Quest isn't a buy today

There's nothing wrong with Quest's business, as the company is producing strong, consistent numbers. The problem is that there's not enough growth. If a stock offers little in the way of growth, dividends can make up for that with a good and growing yield. While Quest has been increasing its payouts, at a dividend yield of around 2% per year, there are simply more attractive dividend stocks available for investors' money today — not to mention healthcare stocks.

Trading near its high and at a price-to-earnings multiple of 20, Quest is a bit expensive for a stock that has generated little to no growth in recent years. A PEG ratio of more than 3 also suggests there just isn't enough growth in the company's future to justify its current valuation. Generally, investors normally look for a PEG of 1 or less to indicate a good growth buy. 

Investors should keep an eye out on Quest in case the stock falls and becomes a cheaper buy. But for now, the stock just doesn't offer enough value, growth, or dividends to make it an attractive investment today.

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Stocks Mentioned

Quest Diagnostics Incorporated Stock Quote
Quest Diagnostics Incorporated
DGX
$135.39 (-0.73%) $-1.00
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
UNH
$489.22 (0.79%) $3.82

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