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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 that 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. Check out last week's selection.
This week, I'll point out a "purrrrfectly" positioned company in the pet sector, Zoetis (NYSE: ZTS ) , and highlight why it could be paying hefty dividends for decades.
Can competition slow down Zoetis?
There isn't much standing in the way of Zoetis' success, other than a rash of growing competitors and the fact that its parent company, Pfizer (NYSE: PFE ) , still exerts quite a bit of control over the company's growth prospects with 80% ownership in the recently spun off company.
The pet medication space is quite the crowded field. Zoetis certainly leads the pack with $4.3 billion in annual sales, but with a $22 billion pie from animal health revenue alone, Merck's (NYSE: MRK ) animal health division, Sanofi's (NYSE: SNY ) Merial, and Eli Lilly's (NYSE: LLY ) Elanco, all take a greater than $2 billion annual bite as well. Sanofi's Merial was the only animal products maker of the four to see sales decrease in its latest quarter, as unfavorable weather conditions and increased competition to Frontline hurt its results.
The Zoetis advantage
There's a reason I dubbed Zoetis as the most exciting IPO of the year back in January -- it has a slew of competitive advantages that will keep its growth and cash flow strong for years to come.
The most interesting aspect that differentiates animal pharmaceuticals from human pharmaceuticals is that while competition exists, personalized competition for common ailments like obesity and diabetes really doesn't exist on the animal side of the business. Sure, there may be branded drug competition for things like flea medication (see Merial's Frontline issues again), but the general trend in the sector is that Big Pharma has better things to do than spend millions researching biosilimars of existing drugs -- at least for pets. This means that Zoetis' anti-obesity pill for dogs, Slentrol, should be well protected when it comes off patent, and the same could be said for much of its pipeline, as well as that of Merck, Sanofi, and Eli Lilly's animal health divisions.
Another factor that's undeniable is that we as pet owners will do whatever's necessary to ensure the health of their pets. Don't get me wrong: The Association for Pet Obesity Prevention says that more than half of all pets are currently considered overweight or obese, so not all owners are doing what's in the best interest of their pets. But the general trend is that our pets have become ever-more engrained into the American household as a family member.
This is an important point, as few owners choose to provide health insurance for their pet. Most drugs are thus paid for right out of consumers' pockets, providing unparalleled margins that you just won't find in many, if any, human pharmaceutical drugmakers.
It'd be foolish of me not to mention the simple fact that as a spun off entity, Zoetis is the most transparent pharmaceutical company of its peers. Merck, Sanofi, and Eli Lilly's animal health units are all incorporated into their results, making it tougher to see where the strengths and weaknesses of their animal health businesses lie. This spinoff certainly unlocked value for shareholders and made researching Zoetis' pipeline considerably easier than it had previously been.
Bring on the payouts
Most of you are going to look at Zoetis' 0.8% yield, scoff or snicker, and probably move right along ... but hear me out. Consider for a moment that Zoetis just made its debut a few months ago, so it needs to get its bearings about it as a public company. It's fairly uncommon to see a big dividend right out of the gate unless the company is a REIT, so I say cut it some slack.
Also consider that Pfizer still owns 80% of all outstanding shares of Zoetis. This means that as Zoetis' share price rises and as it pays dividends, Pfizer is a direct beneficiary just like shareholders. Current Pfizer CEO Ian Read has made no qualms about beefing up Pfizer's share repurchase program or paying out a significant portion of earnings in the form of a dividend in order to appease shareholders, so I wouldn't expect anything different from Zoetis' management. At the moment, with an annual payout of $0.26, Zoetis is paying just 19% of projected 2013 EPS. Pfizer, comparatively speaking, is paying more than double that at 43%. I think it's just a matter of time before Zoetis dramatically boosts its payout to reflect something similar to Pfizer's payout ratio.
Zoetis' yield may not be much to look at now, but a growing trend that has pets becoming a part of the American family has certainly given rise to a massive animal health market. Zoetis is by far the best positioned to capitalize on that trend and looks poised to deliver growing profits and payouts to shareholders in the coming years. I guess what I'm saying is that it gets four paws of approval in my book!
Can Merck beat the patent cliff?
This titan of the pharmaceutical industry stumbled into 2013 and continues to battle patent expirations and pipeline problems. Is Merck still a solid dividend play, or should investors be looking elsewhere? In a new premium research report on Merck, The Fool tackles all of the company's moving parts, its major market opportunities, and reasons to both buy and sell. To find out more click here to claim your copy today.