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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 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Quest Diagnostics' shares before the 4th of October to receive the dividend, which will be paid on the 20th of October.
The company's next dividend payment will be US$0.62 per share. Last year, in total, the company distributed US$2.48 to shareholders. Calculating the last year's worth of payments shows that Quest Diagnostics has a trailing yield of 1.7% on the current share price of $145.31. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Quest Diagnostics has a low and conservative payout ratio of just 14% of its income after tax. 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. Luckily it paid out just 14% of its free cash flow last year.
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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Quest Diagnostics's earnings have been skyrocketing, up 30% per annum for the past five years. Quest Diagnostics earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Quest Diagnostics has delivered 20% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
From a dividend perspective, should investors buy or avoid Quest Diagnostics? We love that Quest Diagnostics is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.
In light of that, while Quest Diagnostics has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Quest Diagnostics that we strongly recommend you have a look at before investing in the company.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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