Lots of Aussies own Commonwealth Bank of Australia (ASX: CBA) shares for dividend income. But, there's a different ASX dividend giant I'd prefer to buy: Sonic Healthcare Ltd (ASX: SHL) shares. I think the ASX healthcare share is one of the best blue-chip options.
Why Sonic Healthcare shares over CBA shares?
For starters, healthcare is a much more defensive sector than banking. In an economic downturn, I'd expect Sonic Healthcare's earnings to remain resilient compared to CBA, which could suffer from borrowers falling into arrears (and leading to bad debts).
I'll acknowledge that owning CBA shares currently pays a higher dividend yield. The ASX bank share's grossed-up dividend yield is currently 5.7%, while the Sonic Healthcare grossed-up dividend yield is 4.6%.
But, investing is a long-term endeavour and Sonic's dividend growth has been exceptional.
Compared to FY18, the Sonic FY23 dividend was 28% higher. CBA's FY23 dividend was only 4.4% larger than FY18. Over time, I think Sonic's dividend will be able to grow and catch up to CBA's yield.
There are a few different reasons why I think Sonic Healthcare's dividend can keep rising.
Solid revenue tailwinds
Sonic Healthcare operates in a number of economically-strong countries including Australia, the US, Germany, the UK and Switzerland. All of these countries have a strong commitment to healthcare spending, and that spending could continue to rise over time.
People are living longer than they used to – populations are ageing. I think that bodes well for a growing need for pathology services in the ASX dividend giant's core markets.
On top of that, national populations in countries like the UK, Australia, Germany and the US are increasing, partly due to immigration. This increases the potential number of patients who could (regularly) need the ASX dividend giant's services.
I also like that the company is making acquisitions to increase its presence in other countries. It has made a few sizeable acquisitions in Switzerland and Germany in the last couple of years.
Long-term margin growth potential
The company's financials are currently adjusting to the loss of the millions of COVID-19 tests it was doing. But, I think the business can deliver increasing underlying margins once it's no longer reporting periods that are comparing against COVID-boosted results.
Sonic Healthcare's growing scale alone can be a boost for profit margins. Stronger margins can enable the business' profit to grow faster than revenue.
The ASX dividend giant is working on digital pathology and AI, which are "set to transform anatomical pathology, through step-change gains in efficiency, quality and capacity." The Pathology Watch acquisition could also be helpful.
Progressive dividend policy
The ASX healthcare share itself has a stated progressive dividend policy, which bodes well for the direction that the dividend is going to go, assuming the ASX dividend giant has the profit generation to pay for it.
The estimate on Commsec suggests the Sonic Healthcare annual dividend per share could increase 7.7% by FY25, which would be a grossed-up dividend yield of 5%.
