This ASX 200 stock is tipped to lift dividends by 87% this year

The dividend outlook for ASX stocks is much improved for FY21 but there’s one large cap that could lead the pack.

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The dividend outlook for ASX stocks is much improved for FY21 but there’s one large cap that could lead the pack.

Dividends from S&P/ASX 200 Index (Index:^AXJO) stocks were slashed in COVID-19-stricken FY20 but the worst seems to have passed.

Companies are again ready to grow their dividends this financial year and ASX big banks like the National Australia Bank Ltd. (ASX: NAB) share price and Westpac Banking Corp (ASX: WBC) share price are good examples.

Best large cap dividend grower for FY21?

While the dividend increase from this sector is expected to be impressive, it could be outpaced by the Sonic Healthcare Limited (ASX: SHL) share price.

UBS is predicting that dividends from the medical testing facilities operator will surge by 87% in FY21 compared to the previous year.

This puts Sonic’s dividend payment at $1.59 a share and we will find out as early as next month if UBS’ estimates are on the money.

COVID testing drives Sonic’s dividend surge

What’s driving the big dividend upgrade is COVID testing. This is something I’ve highlighted over a week ago as Australia ramped up its testing regime.

Now that the first half of FY21 is passed, the broker has run the numbers on what the increase in COVID PCR tests will mean for Sonic, and it’s substantial.

The contribution isn’t only from Australia where the emergence of the more contagious UK-variant sent state governments into a testing frenzy. The increase in testing in Europe and the US is also benefiting Sonic’s bottom line.

PCR worth more than $1 billion to Sonic

“We note that in US/Germany/UK, testing rates increased in the Oct-Dec 2020 period (vs Jul-Sep), with a degree of softening in AUS (prior to a surge in late December),” said UBS.

“For 1H21, we now derive ~A$1.4bn (out of total group revenue of A$4.65bn), specifically from PCR testing revenue (an increase of ~A$400mn vs our previous forecast, translating to a ~20% FY21 EPS upgrade), with 16.4mn tests conducted in the six month window.”

Based on the high margin contribution from PCR testing, the broker is forecasting a 74% growth in group earnings before interest, tax, depreciation and amortisation (EBITDA) in 1HFY21.

That is a little above the 71% growth reported in Sonic’s September quarterly update.

Is the Sonic share price cheap?

But UBS isn’t quite ready to recommend the Sonic share price as a “buy” at this point. It pointed to the group’s poor track record at growing earnings per share, despite the benefit of acquisitions.

It also pointed out that the rate of COVID testing will drop in the next 12 to 18 months if the rollout of mass vaccinations stays on schedule.

Given how vaccinations programs from the US to UK have kicked off though, that might be a big assumption.

UBS rates the Sonic share price as “neutral” with a 12-month price target of $34.75 a share.

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Motley Fool contributor Brendon Lau owns shares of National Australia Bank Limited and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended Sonic Healthcare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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