Whether you're a doting dog mom or a steely-eyed cattle rancher, you'll probably agree that animals need healthcare, just as we do. Enter Zoetis (ZTS 0.29%), a multinational pharmaceutical player that caters exclusively to developing medicines and other healthcare goods for pets and livestock.
Thanks to its long history of developing and selling everything from pet pain pills to diagnostic hardware for veterinary clinics, this company has a lot to offer for investors of all stripes. To explore whether it's a smart choice for your portfolio, take a look at these three points in favor of buying Zoetis; then let's learn one reason you might do better to sell it.
NYSE: ZTS
Key Data Points
1. It's the biggest fish in an expanding pond
The most compelling reason to buy Zoetis stock is that it's positioned to continue its long-term trend of penetrating its markets faster than the competition. It's already the largest competitor in the global markets for animal healthcare products intended for administration to companion animals, fish, swine, and cattle. In total, its addressable market within the animal health industry is estimated by management to be around $45 billion. And that market grew by around 5.8% each year, on average, over the last 20 years.
Since 2017, Zoetis has grown its operational revenue faster than the growth of its markets, which implies that it gained market share steadily. With a handful of recent regulatory approvals across the globe for its arthritis and antiparasitic medications for pets and livestock, and even more on the way in 2023, that trend is likely to continue.
Furthermore, trailing-12-month research and development (R&D) spending was only $529 million out of just over $8 billion in revenue, so it won't cost Zoetis too much to keep churning out new treatments, vaccines, software packages, and other animal health technologies for the foreseeable future.
2. Its margins are getting even wider
Zoetis is profitable, and it's getting more so over time, which is typically a very positive sign for investors considering a purchase of a stock. Today, its quarterly profit margin stands at 26.4%, blowing unprofitable competitors like Elanco Animal Health out of the water.
One of the drivers of its margin expansion is that veterinary clinics are bringing in more revenue as the range of interventions widens. They're also getting pet owners to spend more money per visit than they were in the past. And as Zoetis continues to develop new offerings for its customers in veterinary clinics and beyond, its margins could keep growing, though probably not at a rapid pace.
In addition, some of the company's newer products, like its cattle-ranching analytics software, are likely higher-margin than its traditional collection of pharmaceuticals.
3. It's a serial dividend-hiker
While Zoetis' forward dividend yield of around 1% won't do much for your portfolio's value in the first year you invest, the company has a tradition of hiking its payout, so there's a good chance that holding its shares will disburse more and more cash over time.
In the last five years alone, management increased its payout by 198%, including a 15% hike for 2023. Since Zoetis only pays out around 28% of its earnings, it has an abundance of overhead to keep raising the dividend.
What's more, management prioritizes continuing to return capital to shareholders, spending nearly $1.4 billion in share repurchases over the trailing-12-month period.
But like all businesses, this one isn't perfect, so let's examine one reason why it might be worth selling if you're currently a shareholder.
Near-term headwinds could stick around a while
Despite these positives, it's been a tough time for Zoetis shareholders with the stock losing some 24% of its value over the past 12 months -- and the coming 12 months might not be much better.
In Q3, the company was forced to slightly slash its expectations for 2022 from its original estimate of at least $8.3 billion to a new lower bound of $8 billion. Management attributes the subpar performance to a trio of maladies: a shortage of skilled veterinary labor, trouble in its supply chain, and a brutal foreign-exchange-rate environment.
Given its global-scale operations, all three of those issues are likely to continue to sting for longer than shareholders might prefer. Within a year or so, it's very likely that these problems will abate. Until then, there'll be stormy waters for Zoetis, and that might be enough of a reason for shareholders who need their money in the short term to sell their shares.
