1 ASX dividend stock to buy that's down 40%

I think this stock offers very healthy dividends.

| More on:
A Sonic Healthcare medical researcher wearing a white coat sits at her desk in a laboratory conducting a COVID-19 test

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Tristan Harrison has positions in Sonic Healthcare. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Father in the ocean with his daughters, symbolising passive income.
Dividend Investing

3 top ASX 300 dividend shares to buy now for $3,000 a month in passive income

I think the long-term passive income potential remains very strong for these ASX dividend stocks.

Read more »

three young children weariing business suits, helmets and old fashioned aviator goggles wear aeroplane wings on their backs and jump with one arm outstretched into the air in an arid, sandy landscape.
Dividend Investing

3 ASX shares with a long history of increasing dividends

These stocks keep giving investors pay raises.

Read more »

An elderly retiree holds her wine glass up while dancing at a party feeling happy about her ASX shares investments especially Brickworks for its dividends
Dividend Investing

2 cheap ASX dividend shares I'd buy in retirement

I think retirees will love these two dividend stocks.

Read more »

A smartly-dressed businesswoman walks outside while making a trade on her mobile phone.
Dividend Investing

Here's the new Telstra dividend forecast through to 2026

Here's what analysts are forecasting for the telco giant's dividend.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

4 excellent ASX dividend stocks to buy in June

Brokers expects great returns from these income options.

Read more »

Man holding out $50 and $100 notes in his hands, symbolising ex dividend.
Dividend Investing

Beat the bank! 2 ASX stocks worth buying to make more money than interest on savings

I'd rather buy these two stocks than open a term deposit today.

Read more »

A young woman holds her hand to her mouth in surprise as she reads something on her laptop.
Dividend Investing

This ASX dividend share is predicted to pay a 9% dividend yield in 2026!

This stock is paying big dividends, and even bigger payouts are potentially on their way!

Read more »

a man looks down at his phone with a look of happy surprise on his face as though he is thrilled with good news.
Dividend Investing

With a dividend yield over 7%, are Telstra shares a buy for income?

Are these dividends too good to ignore?

Read more »