When you're smooshing your dog's monthly heartworm pill into a dollop of peanut butter to make it more appetizing for Fido, there's a good chance that you're trying to get your pet to consume one of Zoetis' (ZTS 0.88%) products. The company makes diagnostic tests and medicines for pets and livestock, and it's actually the largest pet healthcare business in the world.
Given that people love their pets and want to keep them healthy, such a business model seems like it'd be quite reliable over time. But did Zoetis' shareholders actually make money over the last 10 years, and is the stock a worthy purchase for prospective investors? Let's do some quick math and make a few projections to find out.
Here's how much you'd have made and why
Time was on your side if you bought shares of Zoetis in early 2013, right after its initial public offering (IPO). Thanks to its steady penetration of international markets and diligent development of new medicines and vaccines along the way, its net income has risen 345% over the past 10 years, topping $2 billion. Importantly, its dividend has gained an impressive 477% in the same period, which speaks to management's confidence in the company's enduring financial stability, and also its probability of successfully competing in the future.
In short, your $5,000 investment in Zoetis from 10 years ago would now be worth just under $25,500, marking a gain of around 410%. If you reinvested all of the dividends you got paid in that period, you'd have an even higher total return of $27,200. But even if you spent your payouts right away, your investment would still be completely smashing the return of roughly $15,900 you'd have gotten from purchasing an index fund like the SPDR S&P 500 ETF Trust, whether you retained the dividends or not.
Will this stock grow as rapidly over the next 10 years?
So Zoetis was clearly a great pick in early 2013 because it handily beat the market, but let's think about the more pressing question of whether it would be a good pick today.
At the moment, the company is in the process of globally rolling out a pair of biologic therapies for osteoarthritis: one for dogs, and the other for cats. It's also developing a handful of other medications for pets and livestock, including anti-itch treatments. And it's providing data management solutions for livestock health, and other software.
Management thinks its total addressable market is worth around $45 billion, which means its estimated sales of roughly $8 billion in 2022 aren't anywhere close to exhausting the opportunity in the animal healthcare market. Furthermore, in Zoetis' dermatology and parasiticides segments, it's growing slightly faster than the underlying market, meaning that it's slowly gaining market share.
At the same time, veterinary clinics are consistently bringing in more revenue per visit than they were just a few years ago. The company estimates that each visit now costs around $160, whereas at the start of 2018 it only cost in the ballpark of $130. If this trend holds up, it'll mean that veterinarians are likely increasing their purchases of Zoetis' products over time, which is an obvious tailwind. Increasing spending could also be part of why the business's profit margin grew over the last 10 years.
Overall, there don't appear to be any red flags for investors, though the third-quarter earnings report suggests that the company is facing a trio of temporary sales headwinds from a veterinary workforce shortage, unfavorable foreign exchange rates, and hiccups in the supply chain. Those continued headwinds are a major reason why the stock is down 24% in the last 12 months.
These obstacles will likely abate eventually, and they don't detract from the long-term investing thesis for the stock. Therefore, while there's no guarantee that an investment in Zoetis will perform as well in the next 10 years as it did in the last 10, it's a decent option for investors looking to buy a growth stock in 2023.
