The ASX dividend stock Sonic Healthcare Ltd (ASX: SHL) has seen its fair share of pain over the last few years, despite the ongoing growth of the underlying business.
ASX healthcare shares can be appealing for dividends because they typically have fairly consistent demand – people don't choose when to get sick or when to require healthcare.
It's understandable why Sonic has fallen from its peak in 2021 – the number of COVID-19 tests being done have dramatically reduced. Sonic was one of the key businesses doing tests in laboratories during 2020, 2021 and 2022.
Its main business operations provides pathology services in multiple countries such as Australia, the US, the UK, Germany and Switzerland.
I believe the sell-off has gone too far on a long-term view, making it attractive for dividend investors.
Appealing core business for this ASX dividend stock
One of the main things I want to see from any potential ASX dividend stock investment is good operational growth from the main business. This can help maintain and grow the existing dividend.
In the recent Sonic FY24 first-half result, the business reported "strong" base business organic revenue growth of 6.2%. It revealed base business revenue growth of 15%, which included recent acquisitions.
Sonic Healthcare said the base business growth is set to continue, with strong underlying drivers. Shorter-term earnings drivers include operating leverage and the rollout of an enhanced revenue collection system in the USA in progress (with material upside expected from FY25). The company is expecting fee growth in various markets and contracts, including Sonic's radiology, UK, Belgium, and Sonic clinical services (SCS) divisions.
Its AI-related initiatives are also very promising. With its PathologyWatch acquisition, there is significant revenue growth and efficiency gains from digital deployment. It said there is "synergistic diagnostic technology investments with material future earnings potential", with PathologyWatch, Harrison.ai/Franklin.ai and Microba Life Sciences Ltd (ASX: MAP).
Acquisitions
The ASX dividend stock is boosting its revenue by making acquisitions, with a recent focus on Europe. Not only does this give Sonic Healthcare more revenue, but its scale can boost the margins of those acquired businesses.
For example, with Synlab Suisse, Sonic Healthcare said there is "significant synergy and earnings upside and from current low-margin position."
Just over a month ago, it acquired Dr Risch Group for CHF117 million, which equates to around AU$195 million today. In the 2023 calendar year, the Swiss laboratories generated revenue of approximately CHF94 million (AU$157 million) and around CHF8 million (AU$13 million) in the Liechtenstein laboratory.
Sonic Healthcare has been putting its COVID-19 cash to good use with these acquisitions.
Dividends
The ASX dividend stock has a stated progressive dividend policy. In other words, it wants to grow the dividend if it can for shareholders.
Amazingly, the business has grown its annual dividend per share most years over the past three decades, which is a good record for investors looking for stability.
Excluding franking credits, Sonic is predicted to pay a dividend yield of 3.9% in FY24 and 4.2% in FY26.
