Diversifying across economic sectors that provide highly valued goods or services is a foolproof blueprint for success as an investor. Diagnostic tests will continue to guide treatment decisions made by healthcare professionals and their patients. If there's a demand for healthcare, there should also always be a need for diagnostic tests.
One of the leading diagnostic test makers is Quest Diagnostics (DGX 0.02%). But should dividend growth investors consider this company for their portfolio after last month's 7.6% raise in its quarterly dividend per share? To figure that out, let's peek under the hood of Quest Diagnostics' fundamentals and valuation.
More than just a COVID-19 test maker
Quest Diagnostics is likely most well-known by patients for its variety of COVID-19 tests. But with more than 3,500 different lab tests performed at over 2,200 locations in the U.S., the company isn't dependent on COVID tests for its revenue. In fact, Quest Diagnostics' product offerings are so wide-ranging that it serves one-third of the adult U.S. population and half of U.S. physicians and hospitals each year.
The Secaucus, New Jersey-based company recorded $9.9 billion in total revenue during 2022, which was 8.4% lower than the previous year. The only reason behind Quest Diagnostics' 2022 drop in revenue was a 48% plunge in COVID-19 testing revenue to $1.5 billion. Due to reasonably high vaccination rates, the demand for COVID testing dropped sharply over 2021.
Factoring out COVID testing revenue, the company's base business revenue edged 5.1% higher year over year to $8.4 billion for 2022. This was as many patients returned to the healthcare system for lab tests when it became safer to do so.
Quest Diagnostics reported $9.95 in non-GAAP (adjusted) diluted earnings per share (EPS) in 2022, which was down 30% over the year-ago period. Operating costs grew at a faster clip than revenue (0.6%) during the year, which led to a 500-basis-point decline in the non-GAAP net margin to 11.9%. But this decreased profitability was partially offset by a 7.8% reduction in Quest Diagnostics' outstanding diluted share count. These factors are how the company's adjusted diluted EPS contracted at a greater rate than total revenue fell for 2022.
As COVID testing revenue further dries up and Quest Diagnostics launches new non-COVID tests, the company should return to growth in 2024 and beyond.
Image source: Getty Images.
A well-covered, market-beating dividend
While shareholders wait for Quest Diagnostics to rebound from its post-COVID lull, they can appreciate its 2% dividend yield. For context, that's moderately above the S&P 500 index's 1.7% yield.
And with the dividend payout ratio poised to come in below 33% in 2023, Quest Diagnostics can keep enough capital for reinvestment back into the business, debt repayment, and share repurchases. This is why I believe the dividend is quite safe and positioned to keep growing.
The stock is cheaply valued
Quest Diagnostics' shares have been a steady performer over the last year, gaining 6% in a down market. And there could be more upside in the stock's future.
This is because Quest's forward price-to-earnings ratio of 15.1 is far below the diagnostics and research industry's average of 22.9. Such a cheap valuation for an innovative company probably explains why analysts have an average 12-month price target of $150, which would represent a 7% increase from the current $140 share price.
That's why Quest Diagnostics looks like an interesting pick for dividend growth investors at the present valuation.
