Smart Dividend Portfolio Edition #44: Profitable Diagnostics
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Dear Investor,
Welcome to the 44th edition of TipRanks’ Smart Dividend Portfolio & Newsletter.
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Market-Moving News: January 20, 2025
Stocks surged last week, clocking in their best week since the November presidential election and moving into the green year-to-date. The S&P 500 (SPX) was up by 2.91% for the week, while the Dow Jones Industrial Average (DJIA) jumped by 3.69%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) rose by 2.45% and 2.85%, respectively. The rally broadened to include all S&P 500 sectors as Treasury yields reversed their previous climb, removing some pressure from both the more leveraged sectors and the ones with higher valuations.
Better-than-expected Core CPI data eased fears of a reacceleration in inflation, firming rate-cut expectations, and encouraging investors, who rushed in to buy the dip. At the same time, reports that any potential tariff implementation would likely be gradual, in addition to reports that President-elect Trump spoke with Chinese President Xi, relieved worries over a potential spike in inflation due to tariffs. The strong start to the earnings season further lifted investor sentiment.
The nation’s largest banks kicked off the Q4 2024 earnings season with a bang. According to FactSet, S&P 500 earnings are projected to have grown 12.5% year-over-year in the fourth quarter, marking the fastest expansion since Q4 2021. The Financials sector is expected to lead this growth with an estimated 47.5% surge, followed by the Communication Services and Technology sectors with increases of 20.7% and 13.9%, respectively.
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This Week’s Quality Dividend Stock Idea
Quest Diagnostics (DGX) is a leading provider of diagnostic information services, offering laboratory testing, clinical trial services, and advanced diagnostics. Its extensive network of labs, patient service centers, and specialized facilities support a wide range of tests, ranging from the routine to more genomic and esoteric diagnostics. A pioneer in precision medicine, Quest is a trusted partner for healthcare providers, patients, and insurers nationwide.
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Growth Through Acquisitions and Innovation
Quest Diagnostics, founded in 1967 as MetPath in New York City, initially specialized in routine diagnostics. Its acquisition by Corning Incorporated in 1982 transformed it into Corning Clinical Laboratories, providing access to greater resources and infrastructure. In 1996, Corning spun off its diagnostics division to form Quest Diagnostics, granting it independence to focus exclusively on diagnostic services and accelerating its growth.
Acquisitions have been central to Quest’s evolution into an industry leader. The 2007 purchase of AmeriPath strengthened its expertise in specialized pathology, while the 2011 acquisition of Athena Diagnostics expanded its neurology portfolio. The acquisition of Solstas Lab Partners in 2014 for $570 million bolstered its presence in the southeastern U.S., and subsequent moves, such as the 2017 acquisitions of Memorial Hermann Health System’s outreach lab services, MedFusion, and Shiel Medical Laboratory, expanded its testing capacity in Texas and the New York metropolitan area.
More recent acquisitions further enhanced Quest’s reach and capabilities. In 2020, it acquired assets from Mid America Clinical Laboratories, increasing capacity in Indiana. The 2024 acquisition of LifeLabs, a leading Canadian diagnostics provider, established a platform for expansion into the Canadian market. Additionally, Quest acquired Allina Health’s lab operations in Minnesota and western Wisconsin, along with the lab businesses of three physician groups in New York. Plans to acquire select outreach lab assets from Ohio Health and University Hospitals will deepen its presence in Ohio.
Alongside acquisitions, Quest has focused on innovation and collaboration to fuel growth. Investments in health IT, automation, and AI have enhanced operational efficiency and patient access. The Quest Management System ensures high-quality services, while partnerships with healthcare providers and hospital systems advance value-based care and population health initiatives.
Quest’s resilience was demonstrated during the COVID-19 pandemic, where it rapidly scaled testing capabilities to meet surging demand. Today, with annual revenues exceeding $10 billion and a market capitalization above $15 billion, Quest Diagnostics operates one of the most extensive diagnostic networks in the U.S.
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Scalable Business Model and Growth Outlook
Quest Diagnostics operates through two key segments: Diagnostic Information Services and Diagnostic Solutions. It generates revenue by offering a wide range of diagnostic tests, including routine, genetic, and esoteric testing, supported by its extensive network of laboratories and patient service centers. These operations ensure high-volume testing and cost efficiency, leveraging economies of scale.
A significant revenue driver is its partnerships with healthcare providers, hospitals, insurers, and biopharmaceutical companies, which provide a steady flow of testing requests and support clinical trials. This, coupled with the growing demand for precision medicine, fuels the company’s growth.
Over the past five years, revenues grew by 4.5%, while earnings increased by 6.9%. Analysts project continued growth, with earnings expected to rise by 11.7% annually, and revenues by 5.1%. Quest’s strong financial performance is also reflected in its high return on equity (ROE) of 15.5%, above the industry average. The company is also in the top 20% in return on assets in healthcare.
Despite a high debt-to-equity ratio, the company’s strong cash flow generation and stable position in the industry maintain its investment-grade ratings. In fact, Fitch cites Quest’s ability to maintain debt leverage at 2.5x on a gross basis due to its robust cash conversion. In Q3, Quest reported revenues of $2.49 billion, up 8.5% YoY, and raised its FY24 revenue guidance. The company raised its FY24 revenue forecast to $9.83 billion at midpoint, up from $9.5 billion. Adjusted earnings are projected at $8.90 per share at midpoint, with Q4 and full-year results likely to be announced on January 30.
Additionally, the company reaffirmed its long-term outlook between 2023-2036 and has projected its revenues to grow at a CAGR in the range of 1% to 2% from acquisitions and its earnings to rise at a CAGR in high-single-digit. Furthermore, Quest expects its margins to expand from 75 to 150 basis points during the same period. With this targeted acquisition strategy, the company anticipates surpassing its revenue growth targets from acquisitions in FY25.
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Stable Growth and Shareholder Returns
For over a decade, Quest Diagnostics has consistently paid and increased its dividends, with a compound annual growth rate (CAGR) of 8.2%. The company currently offers a dividend yield of 2%, surpassing the sector average of 1.62%. Its dividend payout ratio of 33.9% demonstrates that earnings comfortably cover the payouts, while a low cash payout ratio of 32.7% ensures dividends are well-supported by the company’s strong free cash flow. Over the past three years, dividends have grown at a 6.9% annual rate, reflecting management’s commitment to returning value to shareholders while maintaining a sustainable payout strategy. Notably, Quest has maintained uninterrupted dividend payments through various economic cycles, underscoring its financial resilience.
In addition to dividends, Quest actively enhances shareholder value through its share repurchase program. As of December 31, 2023, $1 billion remained under its buyback authorization, with plans to continue opportunistic repurchases. Since 2012, the company has returned approximately $7.5 billion to shareholders through stock buybacks, reducing outstanding shares by over 20%. These repurchases not only increase earnings per share (EPS) but also signal confidence in the company’s long-term growth trajectory.
Quest’s disciplined capital allocation strategy balances rewarding shareholders with investments in innovation and acquisitions. This approach has supported the company’s market position while delivering consistent shareholder returns. Over the past year, DGX stock appreciated by over 10%, supported by robust operational performance and strategic growth initiatives. The stock currently trades at a price-to-earnings ratio of 20, well below the peer average of 39.6, highlighting its relative value. Analysts project a 16% upside over the next 12 months, reflecting optimism about its growth potential.
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Investing Takeaway
Quest Diagnostics presents a compelling investment case with its scalable business model, steady revenue growth, and shareholder-friendly policies. Its robust network, focus on innovation, and strategic acquisitions position the company as a leader in the diagnostic services industry. With consistent dividend growth, active share repurchases, and a history of operational resilience, DGX is well-positioned to deliver sustainable shareholder returns.
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Dividend Investor Portfolio
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Portfolio News
▣ JP Morgan (JPM) reported robust results in the fourth quarter as the bank’s earnings of $4.81 per share surpassed estimates. JPM’s net interest income (NII), excluding fixed income and equity markets, fell 2% year-over-year to $23 billion in Q4 due to lower rates and shrinking deposit margins. For FY25, JPM projects NII of $90 billion, supported by “modestly higher” deposit balances. RBC Capital analyst expects that considering that capital levels exceeded regulatory requirements, stock buybacks are likely in 2025.
▣ BlackRock (BLK) reported strong results in the fourth quarter with earnings of $11.93 per share on revenues of $5.67 billion. Additionally, BLK’s total AUM had soared to $11.6 trillion by the end of the quarter. Morgan Stanley analyst raised the price target on the stock and believes that BLK’s recent acquisitions are “set to unlock growth vectors across private markets and data/technology.”
▣ Edison International (EIX) has plunged by more than 20% over the past month, in the aftermath of the Southern California wildfires. Adding to its woes, it has been reported that its subsidiary, Southern California Edison (SCE) faces a lawsuit in the LA Superior Court from a group of homeowners and business owners. The lawsuit alleges that an electricity pole holding power lines was the cause of the fire.
▣ Philip Morris (PM) announced that the U.S. FDA had approved the marketing of the company’s ZYN nicotine pouches “making ZYN the first and only authorized nicotine pouch in the United States.” The approval was termed as a “slight positive” by UBS analysts as the company was the first to receive this approval.
▣ PepsiCo (PEP) is being sued by the Federal Trade Commission for alleged illegal price discrimination, accusing it of giving a big-box retailer unfair pricing and promotional advantages while raising prices for competing retailers. The FTC claims Pepsi’s actions disadvantaged grocery chains and local stores by denying them similar benefits.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
3.76% | +9.68% | $5,388.17 |
Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
Automatic Data Processing (ADP) | Mar 07, 2025 | Apr 01, 2025 | 2.24% | $5.60 |
Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
Amgen (AMGN) | Feb 14, 2025 | Mar 07, 2025 | 3.27% | $9.52 |
BlackRock (BLK) | Mar 07, 2025 | Mar 22, 2025 | 2.56% | $20.40 |
Edison International (EIX) | Jan 07, 2025 | Jan 31, 2025 | 4.82% | $3.12 |
EOG Resources (EOG) | Jan 17, 2025 | Jan 31, 2025 | 3.95% | $3.64 |
IBM (IBM) | Feb 10, 2025 | Mar 10, 2025 | 3.13% | $6.68 |
JPMorgan Chase (JPM) | Jan 06, 2025 | Jan 31, 2025 | 2.86% | $5.00 |
Kroger (KR) | Feb 15, 2025 | Mar 01, 2025 | 2.82% | $1.28 |
LyondellBasell (LYB) | Mar 10, 2025 | Mar 17, 2025 | 5.27% | $5.36 |
PepsiCo (PEP) | Mar 07, 2025 | Apr 07, 2025 | 3.64% | $5.44 |
Philip Morris (PM) | Mar 21, 2025 | Apr 09, 2025 | 6.06% | $5.40 |
Qualcomm (QCOM) | Mar 03, 2025 | Mar 24, 2025 | 2.25% | $3.40 |
VICI Properties (VICI) | Mar 21, 2025 | Apr 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.