The current coronavirus pandemic has put the U.S. healthcare system under a microscope and emphasized the importance of diagnostic testing. Quest Diagnostics (DGX 2.01%), a leader in both developing and conducting such tests -- including for COVID-19 -- aims to expand its testing reach while rewarding shareholders with ever-increasing dividends.
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Quest's dividend
In 2019, Quest distributed $2.12 per share to its stockholders. The board of directors then authorized a 5.7% increase in the dividend, marking the ninth increase since 2011. Now investors can receive $0.56 quarterly or $2.24 for the full year in 2020. Based on the current stock price of approximately $82, the dividend yields about 2.7%.
Declining test volumes
A key consideration for investors will be determining whether Quest can maintain the dividend during uncertain economic times. On March 31, Quest filed an 8-K with the Securities and Exchange Commission, disclosing that it was withdrawing its previous guidance for 2020. January and February were on track with the original projections; however, the impact of coronavirus took its toll in March.
Quest stated that testing volumes declined by more than 40% during the last two weeks of March. This decline included Quest's recently launched COVID-19 diagnostic, which is running 30,000 tests daily. Even given that activity, a reduction in doctor visits, postponed or canceled medical procedures, and individuals staying home in response to the coronavirus outbreak all contribute to lower test volumes and a potential negative financial impact.
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Quest's financial strength
Revenue will fall. That is clear. Quest might eke out a profit in the first quarter, given that the 8-K filed March 31 states that January and February performed in line with prior guidance. However, the second quarter will reveal a gloomier financial picture. Assuming the cost of sales remains constant but the company sees a 40% drop in revenue, Quest will lose money. The biggest unknown is how long the downturn will last.
Quest boasts $1.1 billion in cash on its balance sheet. It also has $1 billion in accounts receivable, which is money owed to the company that has not yet been received. While payments from individuals could be delayed, especially given rising unemployment and furloughed workers, individual accounts only represent 20% of the outstanding amount. Health insurers and the government make up 22% and 11%, respectively. The remaining 42% is comprised of hospitals, doctors' offices, and healthcare networks, all of which should have some ability to pay on their obligations. This gives me comfort that a portion of that $1 billion will be recaptured by Quest.
Quest fuels much of its business through debt issuances, but of the $8.95 billion it owes, $5.75 billion will not come due for four years or more. It's true that it will need to pay back $1.5 billion in 2020, which could make operations tight. However, if Carnival (CCL -0.42%) can raise $6 billion in debt for its beleaguered cruise operations (which it did this month), then Quest, with skin in the game to help end the coronavirus outbreak, should be able to attract new financing if necessary.
The company might also take advantage of stock repurchases, which provide another way for businesses to deliver value to shareholders. Because these programs are flexible, companies can start and stop as needed. Eliminating or reducing the amount of stock repurchases provides another way for the company to protect its dividend payment.
Assuming no change to the dividend, Quest will pay $2.24 this year for each of 133,455,068 shares outstanding. That's a total of $299 million. Quest repurchased $325 million and $350 million worth of stock in 2018 and 2019, respectively. Quest could re-allocate the stock buy-back money to cover the dividend and still have $25 million to $50 million to spend on repurchases -- and with a cheaper stock price, it can buy more shares for a lower cost.
To be a great dividend stock, a company needs a consistent track record of paying and growing its dividend. Quest hits that mark -- as mentioned, this year marks its ninth increase in as many years. Even in highly uncertain economic times, Quest has the ability to continue making the dividend payment. Its strong cash position, coupled with its ability to raise more capital or re-allocate its stock repurchase commitments, gives me confidence the company will weather the current downturn. Lastly, Quest provides biotech investors an opportunity to have a dog in the fight in the battle against COVID-19.
