Run Away From This New Dividend

You've got to hand it to the management team at Questcor Pharmaceuticals (NAS: QCOR) -- they've got guts. Today, only days removed from a barrage of extremely negative news, the company announced it is initiating a $0.20 per share dividend and more than doubling its share repurchase authorization. Is this move a last-ditch effort to support a depressed stock, or is there more to this show of confidence?

For a quick refresher, here's a quick summary recent Questcor events:

Sept. 19: Health insurer Aetna (NYS: AET) releases a clinical policy bulletin indicating that Acthar, Questcor's lead drug, would not be covered indications other than infantile spasms. Of the 1,526 paid prescriptions for Achthar in its last quarter, only 6% were for infantile spasms. Shares fall 48% on fear of further fallout from insurers.

Sept. 20: Questcor hosts a conference call detailing the reimbursement process for Acthar, suggesting that pushback from insurers is the norm. Management explains that while they regularly see insurance denials, they have a solid record of winning appeals when providing proper patient records. Shares rise 15%.

Sept. 24: A Questcor SEC filing discloses that on Sept. 21, the company "became aware of a U.S. government investigation involving the Company's promotional practices." Shares fall 37%.

Sept. 28: Questcor announces the initiation of a $0.20 quarterly dividend. The company also boosts its share repurchase authorization from 3.2 million shares to 7 million.

Assuming an $0.80 annual dividend, shares are now yielding 4.3%. This ranks Questcor as one of two non-big pharma health care stocks yielding more than 4%. The other, PDL Biopharma (NAS: PDLI) , boasts a massive 7.8% yield but is approaching a massive patent cliff that will likely put that payout in jeopardy.

While today's announcement could be a great opportunity to grab a juicy health care dividend with potential to grow in the future, it could just as easily turn out to be a trap if the company loses additional insurance coverage for Acthar or has to change its promotional practices in a way that impedes future revenue growth.

Despite the attractive new yield, I don't see Questcor as a stock that income investors should be pursuing at this point. However, if the company is able to eliminate the insurance coverage and investigation overhang, it could eventually become an attractive dividend option in an industry devoid of small-cap options. Until then, investors would be better served looking at some rock solid dividend stocks. We outline nine great options in a special free report. Claim your copy by clicking here now.

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Brenton Flynn has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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