Quest Diagnostics (DGX - Get Report) has made big business of trivial lab diagnostics like bloodwork and drug tests. The firm's 2,000 locations make Quest one of the largest medical testing companies in the world, and the recent affirmation of healthcare reform in the U.S. could make the firm even bigger. With more patients insured, the volume of testing that Quest performs is likely to rise in kind.
A changing set of tests should increase profitability as well. The firm has been expanding its offerings to include more complex testing products (such as genetic testing and pathology testing) that have high barriers to entry for physicians' practices to replicate. As a result, testing margins on those products tend to be more profitable for Quest. While improved physician tools are a nice plus that should help make customers stickier, they're unlikely to create a material defense against peers. Instead, a rising industry tide is likely to lift all ships in the medical diagnostics field.
To be sure, Quest Diagnostics' 1.1% dividend yield hardly makes it a core income stock. But a strong balance sheet and improving profitability should lay the path for a hike to its 17-cent quarterly dividend check.The firm's Oct. 17 earnings call looks like a good opportunity for management to give investors a raise.