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Will Quest Diagnostics Cut Its Dividend?

By David Jagielski - May 2, 2020 at 7:46AM

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It may only be a matter of time before the company has to make an important decision regarding its payouts.

During the coronavirus pandemic, many companies have cut or suspended their dividend payments. Quest Diagnostics (DGX -0.29%) hasn't followed suit just yet, but that doesn't mean that it's entirely in the clear, either. The company is facing some headwinds, and it's coming off a disappointing first quarter for the new fiscal year that could put its dividend in jeopardy. Let's take a look at Quest's recent results and see whether dividend investors should be concerned about the safety of the company's payouts.

Revenue and cash are down from a year ago

In its first-quarter results, released April 22, Quest's top line fell by 3.7% from the prior-year quarter. Diluted earnings per share were down about 40% as well. In addition, Quest's cash flow from its operating activities declined by more than 10% from last year's Q1, to $247 million, during the first quarter of the new fiscal year.

With the coronavirus pandemic already affecting Quest's results, management withdrew its forecast for 2020. The diagnostics company has been seeing a sharp decline in the number of tests it provides since the outbreak of the coronavirus, especially during the latter half of March, when "volumes declined in excess of 40%, including COVID-19 testing," according to chairman, CEO, and President Steve Rusckowski.

Company reviewing its results at a meeting.

Image source:Getty Images.

Quest is making cuts, but not to its dividend ... yet

In order to combat the challenges Quest is facing today as a result of the coronavirus pandemic, Rusckowski said he's taken a pay cut and employees are working fewer hours; some have been furloughed as well. While the CEO hasn't specifically mentioned the dividend, the press release stated that "the company's Board of Directors remains committed to its quarterly dividend at this time."

However, the company's debt covenants present a potential problem. Quest notes that it may no longer be in compliance with all its necessary covenants as soon as the second quarter, which would mean the company would not be able to borrow from certain credit facilities and that "lenders would have the right to demand payment of any amounts outstanding." While management is optimistic it can work things out with its lenders and has been in discussions already on the topic, the risk could put a further strain on Quest's cash resources if it does need to make a larger payment on its debt than usual. And putting a stop to its dividend payments could be an easy way to free up cash flow to do that.

Is the dividend at risk?

During the first quarter, the company spent $71 million on dividend payments and $801 million on repaying debt. That's well in excess of the cash it brought in during the period, and if tougher times are ahead, the delta between the cash coming in and going out may only widen.

If the coronavirus is under control and states can reopen and resume regular activities, including hospitals resuming elective procedures and surgeries, there's hope that demand for Quest's diagnostics and testing services will go back up as well. The problem is, that could still be weeks, maybe months away for many states. There's a very real danger that the dividend could be cut or suspended in the weeks or months ahead, and that's something investors need to be cognizant of.

Is Quest a buy?

It's clear that Quest is running into some challenging times, and there's a lot of uncertainty facing the company today. And with Q1 already off to a bad start and COVID-19 causing big problems for the stock, now may not be a good time to buy shares of Quest. There are safer stocks out there that offer similar if not better payouts for investors.

Currently, Quest pays its shareholders a quarterly dividend of $0.56, which yields aboiut 2% per year. That's in line with what investors can expect from an average stock on the S&P 500 index. With Quest's stock trading at about 20 times its earnings and nowhere near its 52-week low of $73.02, there's little reason for investors to consider buying shares of the healthcare stock today. Until there's some more stability in the economy, investors should avoid Quest for the time being.

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.

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