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.
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.