Since its spinoff fromPfizer in 2013, animal healthcare behemoth Zoetis(NYSE: ZTS) has seen its cash from operations nearly quintuple as a stand-alone company. Powered by a diverse array of animal health offerings that serve both the companion animal and livestock industries, Zoetis has become a robust, cash-gushing dividend stock.
Its leadership position in a recession-resistant industry has helped the company deliver total returns more than double that of the Dow Jones since 2013. Despite this incredible run, here's the case for why the best may be yet to come for Zoetis, making it a top dividend stock to consider on your quest to beat the Dow.
Dominating the animal healthcare industry
Zoetis generates 65% of its sales from companion animal products (dogs, pets, and horses) and 34% from its livestock offerings (cattle, swine, poultry, fish, and sheep). Dominant in the animal healthcare industry, Zoetis garners 90% of its sales from species in which it is already a market leader. Similarly, the company holds a No. 1 position in the North American, South American, and Asian markets while also being the second-biggest animal healthcare company in Europe.
Despite this market leadership, Zoetis is not resting on its laurels, having spent over $5 billion in research and development (R&D) since its initial public offering. Thanks to this constant innovation, the company's R&D team has brought over 300 new product lines to the market, building up two therapeutic areas in dermatology and parasiticides, which now combine for $3 billion in sales.
In addition to these new therapeutic areas, management believes it has located its next $1 billion niche in helping dogs and cats with osteoarthritis (OA) pain. Recently launching Librela for dogs and Solensia for cats, Zoetis aims to help the fact that roughly 40% of both species have clinical signs of OA pain. Worse yet, 80% of dogs over the age of 8 and 90% of cats over the age of 12 battle OA pain, making the new medications a must-have for many loving pet owners.
While the company recently faced negativity from the European Medicines Agency, which cited over 20,000 adverse events tied to Zoetis' OA medications, CEO Christine Peck said that the adverse event rate was only 0.18%. With 78% of vets in the United States "very satisfied" with Librela and vets in Europe giving the medication an 8.6 out of 10 rating (the highest of any OA drug), it seems these adverse-event fears were overblown.
With Librela and Solensia growing by 126% combined during the company's first quarter in 2024, pet owners seem more than happy to let their wallets vote in favor of the new medications. Management went on to explain that even in April -- shortly after the negative report -- the drugs continued to experience accelerating growth compared to the first quarter.
Image source: Getty Images.
Strong cash flows, dividends, and more
Powered by its diversified and quickly growing array of companion animal products and its steady-Eddie livestock unit, Zoetis has turned into a highly profitable, cash-generating machine.
ZTS Profit and Owners' Cash Profits Margin (FCF Margin) data by YCharts
While its free cash flow (FCF) margin has lagged its net profit margin over the last few years, it is still exceptional at 22%. Most of this gap between the company's two margins is tied directly to its booming capital expenditures spending, which is being used to build global manufacturing capacity, open new laboratories, and buy equipment for its R&D.
ZTS CAPEX To Revenue (TTM) data by YCharts
Over time, this spending should revert to lower levels, which would boost the company's FCF figures, giving management even more money to return to shareholders through stock buybacks and dividends.
Quintupling its dividends paid over the last decade while buying back 1% of its outstanding shares annually over that time, Zoetis has a stellar track record of rewarding its shareholders.
ZTS Shares Outstanding and Dividends Paid data by YCharts
Currently paying a 1% dividend yield that only uses 30% of its total net income, the company has plenty of room to continue raising its dividend far into the future -- all while steadily buying back shares.
With the animal healthcare industry expected to grow by roughly 5% annually over the next decade, Zoetis is well-positioned to continue succeeding alongside the "humanization of pets" megatrend. Outpacing the broader animal healthcare industry's growth in each of the last 10 years, the company looks like an excellent cash-gushing dividend stock that could easily continue outperforming the Dow Jones.
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Josh Kohn-Lindquist has positions in Zoetis. The Motley Fool has positions in and recommends Pfizer and Zoetis. The Motley Fool has a disclosure policy.
