Invest in this Dividend Dynamo to Outperform the Dow Jones
Since its breakaway from Pfizer in 2013, animal healthcare titan Zoetis (ZTS -1.03%) has experienced a staggering increase in operational cash flows. As a solo entity, this spinoff has seen its cash inflows nearly multiply fivefold. With a comprehensive portfolio catering to both companion animals and livestock, Zoetis has solidified its position as a lucrative, dividend-generating stock.
Powered by its role in a recession-resistant sector, Zoetis has surpassed the Dow Jones' total returns performance by more than double since its inception. Despite its remarkable performance, there's compelling evidence that Zoetis' best days are still ahead, making it an exceptional option for individuals aspiring to surpass the Dow Jones.
Dominating the animal healthcare landscape
Zoetis derives 65% of its sales from its companion animal line (dogs, pets, and horses), while the remainder comes from livestock (cattle, swine, poultry, fish, and sheep). Boasting a powerful presence in the animal healthcare industry, Zoetis dominates in no less than 90% of the species where it holds the market crown. This supremacy extends to the North and South American markets, as well as to Europe, where it ranks second in terms of animal healthcare companies.
Refusing to rest on its laurels, Zoetis has invested over $5 billion in research and development (R&D) since its public offering. This relentless innovation has resulted in the introduction of more than 300 new product lines to the market. In addition, Zoetis has cultivated two critical therapeutic areas in dermatology and parasiticides, collectively bringing in $3 billion in sales.
Zoetis recognizes its next billion-dollar opportunity lies in combating the pain associated with osteoarthritis (OA) in dogs and cats. In line with these objectives, the company has introduced Librela for dogs and Solensia for cats to target the significant number of pets suffering from OA pain. Approximately 40% of dogs and 90% of cats above a certain age wrestle with OA-related pain, making these treatments a vital option for pet lovers.
However, Zoetis encountered challenges when the European Medicines Agency raised concerns over 20,000 reported adverse events associated with its OA medications. CEO Christine Peck asserted that the reported adverse events amounted to only 0.18%. Despite these allegations, both American and European veterinarians express high satisfaction levels with Librela (8.6/10) and Solensia, with 78% of American veterinarians expressing satisfaction with the former.
With Librela and Solensia seeing a combined surge of 126% during the first quarter of 2024, pet owners have demonstrated their continued support for these treatments, further reinforcing Peck's assertion that these concerns were unwarranted.
Robust cash flows, dividends, and expansion
Thanks to its diverse and fast-growing array of companion animal therapies and its dependable livestock division, Zoetis has transformed itself into a financially disciplined, cash-generating powerhouse.
While its free cash flow (FCF) margin has lagged behind its net profit margin, it still remains exceptional at 22%. The principal reason behind this lag relates to surging capital expenditure, which is primarily used to enhance global manufacturing facilities, establish new research institutions, and fund innovation within its R&D department.
As capital expenditure levels return to more reasonable levels, Zoetis's FCF is poised to see a significant increase, enabling the company to distribute even more wealth to its shareholders through both stock buybacks and dividend payments.
Over the past decade, Zoetis has tripled its dividend payouts while purchasing 1% of its outstanding shares annually. The company's current 1% dividend yield only depletes 30% of its total net income, opening up substantial room to boost its dividend further while continuing to repurchase shares.
As the global animal health industry is projected to grow by 5% annually over the coming decade, Zoetis is ideally suited to maintain its winning streak alongside the "anthropomorphism of pets" trend. Outperforming the entire animal healthcare industry by leaps and bounds in each of the past 10 years, Zoetis presents itself as the ultimate cash-flowing dividend stock, capable of outperforming the Dow Jones.
Zoetis's robust cash flows have allowed it to increase its dividend payouts by threefold over the past decade, currently offering a 1% dividend yield that only utilizes 30% of its net income, suggesting ample room for further increases. Being positioned in a growing industry forecasted to expand by 5% annually for the next decade and outperforming the animal healthcare industry each year, Zoetis showcases great potential for delivering superior returns compared to the Dow Jones as a dividend-generating stock.
Recognizing the significant number of pets struggling with osteoarthritis pain, Zoetis has invested in developing Librela for dogs and Solensia for cats. These treatments have seen a combined surge of 126% in the first quarter of 2024, demonstrating strong support from pet owners, and further strengthening Zoetis's position as an innovative and financially successful company in the animal healthcare sector.
