Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Quest Diagnostics Incorporated (NYSE:DGX) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 3rd of October will not receive this dividend, which will be paid on the 21st of October.
Quest Diagnostics's next dividend payment will be US$0.5 per share, on the back of last year when the company paid a total of US$2.1 to shareholders. Based on the last year's worth of payments, Quest Diagnostics has a trailing yield of 2.0% on the current stock price of $105.49. If you buy this business for its dividend, you should have an idea of whether Quest Diagnostics's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Quest Diagnostics paid out a comfortable 40% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 30% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Quest Diagnostics's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Quest Diagnostics has increased its dividend at approximately 18% a year on average.
To Sum It Up
From a dividend perspective, should investors buy or avoid Quest Diagnostics? While it's not great to see that earnings per share are effectively flat over the ten-year period we checked, at least the payout ratios are low and conservative. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Quest Diagnostics's dividend merits.
Ever wonder what the future holds for Quest Diagnostics? See what the 18 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.