A Unique Investment Opportunity: The Case for Zoetis as a Strong Dividend Stock

Finding a stock that not only brings joy but also has the potential to outshine the market is indeed a wonderful discovery. One stock that embodies this ideal is Zoetis (ZTS 1.93%), a leader in the animal healthcare industry.

Zoetis supports pet owners by caring for their beloved animals and ensuring livestock remain healthy. It also contributes to important issues, such as tackling the bird flu outbreak, which has led to increased egg prices. Ever since its initial public offering in 2013, Zoetis has proven to be a strong performer, substantially increasing returns for its investors.

Recently, however, the stock experienced a significant price decline of 36%, presenting an unusual buying opportunity. Here are five compelling reasons why I believe investing more in this exceptional S&P 500 dividend stock is prudent.

1. Zoetis: A Diverse Innovator

Zoetis develops a wide range of products including medicines, vaccines, genetic tests, diagnostics, and precision health solutions tailored for both pets and livestock. It is well-diversified within the animal healthcare market. Key highlights include:

• Focus on eight main animal species: dogs, cats, cows, chickens, pigs, horses, fish, and sheep.
• 15 blockbuster products generating over $100 million in annual sales.
• More than 300 different product lines available.
• Over 2,000 new innovations and products developed in the past decade.
• About two-thirds of sales come from companion animals, while one-third is from livestock.
• 55% of revenue is generated in the United States, with the remaining 45% from international markets.
• 90% of sales are from products that rank first or second in market share.

Since 2014, Zoetis has consistently outpaced the general growth of the animal healthcare market, propelled by its continuous focus on innovation. Management anticipates further growth in the veterinary healthcare sector at around 5% per year through 2032, largely driven by the trend of pet humanization.

2. Innovative Treatments for Osteoarthritis

Among Zoetis' latest successes are its osteoarthritis (OA) treatments for pets: Librela and Solensia. These advanced monoclonal antibodies provide enhanced effectiveness compared to conventional non-steroidal anti-inflammatory drugs and have gained popularity among pet owners.

Sales of the OA treatments jumped by 80% in 2024 alone, establishing these products as the fourth-largest revenue stream for Zoetis. With approximately 40% of dogs and cats expected to experience OA in their lifetimes, these treatments are positioned to become increasingly valuable as pet owners invest more in their pets' health.

Given that pets are living longer, the incidence of OA is likely to rise, making these new treatments crucial for pet owners. Currently, Librela is only utilized by about 10% of dogs suffering from OA, indicating significant room for market expansion.

3. Rising Profitability

Zoetis has demonstrated remarkable adaptability through its ongoing product innovations, which have significantly enhanced its profitability. The company's net profit margin has more than tripled since 2012, with return on invested capital (ROIC) now reaching 21%. This level of performance places it in the top tier of the S&P 500.

Stocks that maintain high and increasing ROIC tend to outperform their peers, as they generate superior profits relative to their debt and equity. This strong profitability enables Zoetis to reinvest in its growth, enhancing research and development efforts, as well as pursuing acquisition opportunities while also rewarding shareholders.

4. Share Count Reduction and Growing Dividends

Thanks to its increasing profitability, Zoetis has raised its dividend by an impressive 22% annually over the past decade. Concurrently, the company has reduced its total number of outstanding shares by about 1% each year since 2014, adding an appealing dynamic to its financial strategy.

This reduction in shares boosts Zoetis' earnings per share (EPS) since the decreasing number of shares serves as a smaller denominator in the EPS calculation. The recent 36% decline in share price enhances the impact of stock buybacks, allowing management to repurchase shares at a lower cost. Moreover, despite today's high dividend yield, which is at an all-time peak, it currently consumes only 32% of net income, leaving ample room for future dividend increases.

5. Attractive Valuation Opportunity

Currently, Zoetis trades at a price-to-earnings ratio (P/E) of 29 and offers a dividend yield of 1.2%. Both of these metrics are at historically appealing levels, creating what can be described as a once-in-a-decade investment opportunity. This attractive pricing, coupled with a proven track record of steady growth, increasing profitability, and returning value to shareholders, solidifies Zoetis' position as an appealing S&P 500 dividend stock worth doubling down on at this moment.

Investing, Stocks, Dividends, Healthcare, Growth