1 Great Dividend You Can Buy Right Now

Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.

This week, I plan to take a closer look at PetMed Express (Nasdaq: PETS  ) and show you why Fido could be your key to a healthy stream of dividend income.

Truly amazing paw-tential
There are few areas of the economy that can claim strong growth through both the robust economy of the mid-2000s and the deep recession that followed, but pet supplies is one such sector.

The reason pet supplies and pharmaceuticals have done so well has to do with an increasing social acceptance that pets are part of our family. I'm sure there are plenty of readers out there who've had a neighbors' cat or dog leave them a "gift" or two on their lawn before, and they'd just as soon never see another pet so long as they live, but as a pet owner myself, let me tell you the trend of pet ownership is growing. What's also growing is the amount of money owners are willing to spend to ensure that their pet remains healthy and a part of the family for a long time.

According to figures from the American Pet Products Association, 62% of households owned a pet in 2008, up from just 56% in 1988. More telling of pet spending growth are total industry expenditures:

Source: American Pet Products Association.

Source: American Pet Products Association.

Of the nearly $53 billion forecast to be spent on pet supplies in 2012, APPA anticipates that about $12.6 billion of that figure will be from pet supplies and over-the-counter medications -- PetMed Express' bread-and-butter business.

In its latest quarter, PetMed Express recorded a 10% sales increase, a 22% rise in new orders, and a moderate EPS boost. The biggest drag, however, was a significant boost in advertising and administrative spending that more than offset the increase in sales. With no direct exposure, PetMed has no choice but to spend heavily on advertising to generate sales.

The trend appears to be working, as its latest quarter also saw member usage rise to 162,000 from 130,000 a year earlier. Garnering market share won't be a walk in the park for PetMed, though, as both MWI Veterinary Supply (Nasdaq: MWIV  ) and VCA Antech (Nasdaq: WOOF  ) compete in the same space for online supplies. MWI's pharmacy revenue spiked 46% in the second quarter, while VCA noted strong growth in its smaller "other" sales category that's highlighted by its purchase of Vetstreet in August. Wal-Mart (NYSE: WMT  ) is also a threat, as it does sell direct-to-consumer pet supplies, and as we all know, Wal-Mart can undercut almost any company on price.

Still, there's plenty of room for growth if PetMed currently has only 162,000 members, consumers are frequently choosing online ordering for its convenience, and there are 72.9 million homes with pets in the United States. Those odds are significantly in favor of strong long-term growth prospects for PetMed Express.

A comparative advantage
Growth isn't the only thing that makes PetMed Express an attractive investment. Relative to other companies reliant on pets to drive sales, PetMed offers clear advantages:

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Dividend Yield

PetMed Express 3.1 12.5 14.6 5%
PetSmart (Nasdaq: PETM  ) 6.5 11.8 18.2 1%
MWI Veterinary Supply 4.0 43.9 22.3 0%
VCA Antech 1.5 8.8 11.8 0%

Source: Morningstar.

This is really a sector where there are no losers, just better winners than others.

VCA Antech boasts the cheapest overall metrics, but it can't hold a candle to PetMed Express when it comes to a dividend payout, of which VCA has none. PetMed also has a debt-free balance sheet, complete with $2.84 per share in cash, whereas VCA Antech has $584 million in net debt. Even PetSmart, which has surpassed Wall Street's earnings expectations in four straight quarters, appears to be pricier while offering only a 1% yield even after its latest dividend boost of 18% last week.

In reality, PetMed Express stands alone among pet-supply companies in producing top-tier dividend income. Although it has a short payment history, PetMed has rewarded shareholders with a higher payout whenever feasible:

Source: Dividata.

Source: Dividata.

Foolish roundup
Last July, I joked that it wouldn't be a bad idea to let Fido help you pick out winning pet stocks. If your version of Fido is anything like my dog, he'd probably tell you to buy any company that makes bones -- if he could talk, that is.

However, for all practical purposes, the trend in increasing consumer convenience continues to grow, and so should PetMed Express' business with it. With an estimated 72.7 million untapped households, of which many have Internet, PetMed is more than capable of withstanding a few quarters of an increased marketing budget to drive sales, improve cash on hand, and potentially boost that dividend even higher. It's a company that my dachshund has given four paws of approval.

If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!

Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of VCA Antech and PetSmart. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart and writing covered calls on VCA Antech. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that won't bite the mailman.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2012, at 3:20 PM, PETVET1111 wrote:

    Let me be the latest to comment that in 5 years industry analysts predict petmeds will be gone.As a veterinarian we have been given the tools to compete with this company buy companied reducing the costs to us an allowing us to match prices.In addition,MWI and Butler distributors have set up easy online pharmacies with custom apps for clinics to use.

    Finally,Walmart,Target,are now in the business..as well as Amazon.Pet Meds cannot beat Amazon.

    Full disclosure-I am short Petmeds

  • Report this Comment On June 26, 2012, at 4:18 PM, PETVET1111 wrote:

    sorry for typos..drug companies are reducing prices to veterinarians,offering steep discounts to veterinarians so we can match or beat pet meds prices.All we do is wait for the prescription call from pet meds then we tell clients we will match or beat theor prices.

    Hows this business plan-Pet Meds pays for the TV ads to bring these customers tous!..Nice job Pet meds! Thanks from us all

  • Report this Comment On June 27, 2012, at 5:55 PM, 1caflash wrote:

    I agree with Sean, especially after reading two poorly-written posts. PETS is in my DRIP.

  • Report this Comment On July 01, 2012, at 11:59 AM, ralph1111111 wrote:

    According to a recent article,Walmart,Costco,Sams Club,several discount online pharmacies, as well as neighborhood drug and grocery stores are all chipping away at once solid petmeds sales

  • Report this Comment On July 01, 2012, at 9:14 PM, 1caflash wrote:

    ralph1111111: Can you disclose your source?

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