The healthcare sector has been one of the better performers on the ASX recently, with Sonic Healthcare Limited (ASX: SHL) gaining around 17% in just under two weeks.
No announcements have been made by the company that would explain the significant rise in the share price, but it does appear that some brokers have upgraded their price targets, which may partly explain the rally.
Sonic is involved in laboratory testing/pathology, diagnostic imaging and primary care medical services. It has operations in Australia, the US, Germany, Switzerland, the UK, Belgium, Ireland and New Zealand.
SHL share price
Recent performance
Sonic has turned out to be a strong beneficiary of COVID-19, with over 18 million tests performed in the first half of FY21.
According to a note out of Goldman Sachs’ research, analysts believe that due to strong vaccine progress and the likelihood of a recovery, investors may see Sonic’s COVID-19 testing as a one-off boost rather than a sustainable tailwind, which may explain why the share price has stayed between roughly $30-$35 over the last several months.
The amount of COVID-19 tests Sonic is performing has been falling roughly in line with the number of cases, but analysts are still expecting this to provide a material contribution to the already resilient base business.
What’s to like about Sonic?
If central banks around the world are correct about interest rates staying low for a considerable amount of time, ASX dividend-paying stocks might be a good alternative to investments with a lower yield.
Sonic has a long history of paying out dividends and maintaining its progressive dividend policy. On average, it typically distributes roughly 75% of its profits to shareholders.
Sonic recently declared a 30% franked interim dividend for FY21 of 36 cents per share, which was up 6% on FY20. The final dividend declared for the last two financial years has been 51 cents. While it’s not guaranteed, it seems likely that this will be either matched or increased in FY21.
On an annual basis, Sonic’s annual dividend yield works out to be around 2.6%. This isn’t bad considering the stock has delivered a compound annual growth rate of around 12% over the last 10 years.
Summary
Sonic appears to be a quality healthcare company, along with CSL Limited (ASX: CSL) and Ramsay Health Care (ASX: RHC).
While COVID-19 testing is unlikely to provide a sustainable advantage, it appears the underlying base business is performing well and is likely to continue in a post-COVID world.
For more share ideas, click here to read: 3 ASX growth shares to watch this week.
