Over time, stocks with growing dividends and high returns on invested capital (ROICs) have tended to outperform their peers. By highlighting these qualities -- plus a payout ratio below 50% -- investors can create a stocked pond to fish in and perhaps find the next investing lunker.
One company that fits the bill flawlessly is animal health juggernaut Zoetis (ZTS 3.30%) and its vast suite of medicines, vaccines, diagnostics, and more. Let's explore why history suggests that Zoetis is primed to continue its market-beating ways.
Strong diversification with a focus on ROIC
With 15 of its products each earning more than $100 million in annual sales, Zoetis is a well-diversified enterprise. Better yet, its top-10 products only account for roughly 49% of the company's total sales.
The company operates in two business segments -- companion animals and livestock -- which account for 64% and 35% of revenue, respectively. Zoetis is further diversified across eight species. It is geographically diversified as well, generating 53% of its sales from the U.S. and the rest internationally, including 5% in China.
Zoetis is also a powerful innovator focused on high-ROIC investment areas. Its 1,430-strong research and development (R&D) team has created over 2,000 new products in just the last 10 years.
ZTS Return on Invested Capital data by YCharts
A high-and-rising ROIC positions Zoetis to continue outperforming the market and expand its moat. The company already has a leadership position across its companion animal, swine, cattle, and fish verticals. Together, these account for over 90% of its total revenue, helping it to likely dominate far into the future.
A Dividend King in the making
Thanks to its leadership position in the animal health industry, Zoetis has averaged 5.4% growth annually since 2008 -- and that should help it increase its dividend payments for decades to come.
ZTS Payout Ratio data by YCharts
Zoetis also has a low payout ratio of 30%. This measures the amount of money a company pays out in dividends compared to its net income, with a lower payout ratio implying a better-funded dividend. Zoetis' payout ratio has historically been far below 50%, demonstrating that it can increase its dividend annually while continuing to fund investments for new sales growth.
In the 11 years that the company has paid its dividend, it has recorded an annual growth rate of 15%. For some perspective, if an investor had bought shares of Zoetis 10 years ago and held them until today, they would now receive a 5% dividend yield compared to their original cost basis.
A premium business at a fair price
As promising as Zoetis' diversification, leadership positioning, and dividend increases are, it could mean nothing if the stock is too expensive. However, it looks reasonably priced using the following valuation metrics.
ZTS PE Ratio data by YCharts
On a price-to-earnings (P/E) basis, Zoetis is trading roughly 10% below its average over the last five years. While a P/E of 38 is by no means cheap compared to the broader market, the company may be a perfect example of a premium business trading at a fair price.
Furthermore, its dividend yield is near a five-year high at 0.84%. While that is still modest, it is 50% above its average, showing investors are getting the most passive income potential out of their invested dollars by purchasing Zoetis at today's prices.
Yes, there are stocks with lower P/E ratios and higher dividend yields out there. However, Zoetis' combination of a high-and-rising ROIC, market dominance, dividend growth potential, and a steadily growing animal health industry have the stock looking like a historic opportunity today.
