Is Questcor A Dividend Stock Now?

| About: Mallinckrodt PLC (MNK)

By Ahmed Ishtiaq

Questcor Pharmaceuticals (QCOR) has had a bumpy ride over the past four months. The stock has lost more than half of its value due to some bad press. The company is focused on providing better health to patients by developing drugs for a range of conditions. Its main drug, Acthar Gel is an injectable drug used to treat different conditions. Acthar Gel is mainly used for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. These indications are the main contributors towards the revenues of the company.

Acthar Gel can also be used for rheumatology-related conditions, including collagen diseases and rheumatic disorders. In addition, Questcor offers Doral for the treatment of insomnia. However, the majority of revenues for the company come from Acthar. Concerns about the company being one trick pony due to the lack of the pipeline have caused the stock price to be suppressed. However, I believe these fears are misplaced, and the stock is currently undervalued. In addition, Questcor is paying healthy dividends and the company is trying to return excess cash to shareholders. I decided to look at the stock as a dividend stock. At the current price levels, Questcor has entered into the category of high-yielding stocks.

Dividend Profile

At the moment, Questcor pays an annual dividend of $0.80 per share, yielding 3.13%. Questcor is one of the high yielding stocks available in the industry. The company was initially going to start its quarterly dividend payments at the start of 2013. However, due to the fears of high dividend tax rates, Questcor accelerated the dividend payments. As a result, the company paid its first dividend in December 2012. Questcor generates substantial cash flows from its operations. At the moment, the company is expanding its sales of Acthar Gel in different categories, which will further augment its cash flows.

Over the past twelve months, Questcor has generated $167 million from operations. After adjustments for capital expenditures, the company had trailing twelve months free cash flows of $166 million. Furthermore, Questcor has also returned cash to its shareholders through recent stock repurchases. Over the past year, the company repurchased $243 million worth of shares.

Is Questcor a Dividend Stock Now?

Usually, the companies start to return cash to shareholders when there are not many opportunities for growth or expansion. However, this is not true for every company. Questcor recently made an acquisition, albeit a vertical one which is expected to increase the operational efficiency of the company. I talked about the acquisition in my previous article. The most important thing to consider here is that there are opportunities for the company to grow or take firm control of its supply chain. The cash can be spent on acquisitions or increasing the revenues from other indications on the label of the drug. However, the company decided to return cash to its shareholders, which I believe was a measure to restore investor confidence in the stock after the bad press.

Questcor lost more than half of its value, and I think the board made the right choice to return cash to investors through dividends and stock repurchase. The measures allayed the fears to some extent; however, the stock has to recover a great deal before it can reach its previous heights. According to my calculations, Questcor will need to have $47 million to meet its current annual dividend payments. At the moment, the company has 58,653,000 shares outstanding (Sourced from the most recent 10-Q filing). In addition, it also paid $50 million for the acquisition and the deal can rise to $100 million based on the future events. Questcor will have to put aside some cash to meet this obligation as well. Over the past year, operating cash flows have shown a remarkable growth for Questcor. Operating cash flows at the end of the third quarter of 2012 stood at $135 million, substantially higher than $54 million reported a year ago. Furthermore, free cash flows have also been growing at an impressive rate. As a result, I believe the company will be able to meet its cash obligations over the next year. If revenues and cash flows carry on the current growth pattern; we may well see an increase in dividend payments. So, yes I think Questcor can now be called a dividend stock that can maintain a healthy dividend yield.


Although I believe Questcor is now a solid dividend stock; it does not mean the growth potential of the stock has declined. I maintain my earlier view that the stock is currently undervalued, and once the bad press goes away, the stock will start rising. Despite fears, Aetna (NYSE:AET) and other major insurers continue to provide coverage for Acthar. At the moment, the stock is trading at a P/E ratio of 9.9, and forward P/E ratio of 5.1. At these multiples, I believe the stock is an extremely attractive investment. Questcor has a juicy yield with substantial upside potential, and it can pay handsome reward to patient investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.