Particular financial metrics have been proven to indicate market-beating potential when analyzing stocks. Three examples are businesses with consistently growing dividend payments and a low payout ratio, steady share repurchases, and a high and rising return on invested capital. Finding companies that meet these requirements creates a "stocked pond" for us to fish in.
One business swimming around in this stocked pond is animal health specialist Zoetis (ZTS 3.30%). It's achieved a total return above 500% since its spin-off from Pfizer in 2013, but Zoetis has seen its share price struggle lately. It's now trading 23% below its all-time highs.
Despite this drop, the company's operations have been resilient. With the human-pet bond growing stronger every year -- and the need to maintain healthy livestock always essential -- Zoetis looks poised to set new all-time highs sooner rather than later.
The global leader in animal health
With its medicines, vaccines, diagnostics, and medicated feed additives, Zoetis has over 300 product lines serving companion animals and livestock. It's home to 15 blockbuster drugs generating over $100 million in sales annually. The company operates through two business segments (with subsequent sales-by-species breakdowns):
- United States (53% of sales in 2023): Dogs and cats account for 73% of sales, with cattle adding 16%, horses 4%, poultry 4%, and swine rounding things out with 3%.
- International (46%): Dogs and cats equal 49% of revenue, while the remainder comes from cattle (20%), swine (11%), poultry (9%), fish (6%), horses (3%), and sheep (2%).
Zoetis is a well-diversified powerhouse, holding the No. 1 market position in North America, Latin America, and Asia, alongside the No. 2 spot in Eastern and Western Europe. Despite this market share leadership, the company's growth story appears far from over.
Zoetis received the first U.S. Food and Drug Administration (FDA) approval for its monoclonal antibody drugs to treat osteoarthritis (OA) in cats in 2022 and dogs in 2023. This is a significant step-change over giving nonsteroidal anti-inflammatory drugs (NSAIDs) to pets. These new treatments could eliminate a lot of pain felt by our furry friends.
In the U.S., it is estimated that roughly 40% of dogs and cats show signs of OA, but most went without treatment before Zoetis' breakthrough, primarily due to the risks related to pets taking NSAIDs. Management believes these new drugs should grow to over $1 billion in annual sales at their peak, joining the company's dermatology and parasiticides offerings as $1 billion-per-year therapy areas.
On top of this, Zoetis estimates that the renal, cardiology, and oncology markets for companion animals will triple in size by 2032, creating three additional growth avenues for the company's research and development team to explore.
Impressive -- and improving -- profitability
Buoyed by its leadership advantage and long list of patent-protected drugs, Zoetis has achieved top-tier profitability metrics. However, these figures are truly remarkable because they are still improving.
ZTS Return on Invested Capital data by YCharts
These steadily rising profitability metrics may indicate a widening moat for Zoetis, which appears to be expanding upon its leadership position in its market. Its return on invested capital (ROIC) is particularly noteworthy, as it highlights the company's ability to generate more net income from its debt and equity than most of its peers.
With its current ROIC of 20%, Zoetis ranks in the top quintile of the S&P 500. This is important to investors. Companies in this top 20% have historically outperformed their lower-ranked peers by a wide margin since 2002.
Growing cash returns to shareholders
The company's tremendous net profit margin of 27% arms management with a stockpile of profits to return to shareholders -- and it has a long history of doing so. By buying back roughly 1% of its outstanding shares each year while growing its dividend by 26% annually over the last decade, Zoetis has handsomely rewarded its long-term shareholders.
ZTS Shares Outstanding data by YCharts
S&P Global's S&P 500 Buyback Index shows the potential of share buybacks. Consisting of the 100 most buyback-heavy stocks in the S&P 500, this index has collectively outperformed the broader S&P 500 Index in 16 out of the 20 years from 2000 to 2019.
Furthermore, stocks with growing dividends like Zoetis' have outperformed the S&P 500 Index by 2.5 percentage points annually since 1973. With Zoetis quintupling its dividend over the last decade yet only using 31% of its net income to fund these payments, the company should remain a dividend grower for a long time.
Zoetis' stock is trading at 34 times next year's earnings, so investors should be aware that it isn't traditionally cheap. However, thanks to its three market-beating indicators and a leadership position in an industry that should only become more important with time, Zoetis makes for a perfect dollar-cost averaging opportunity.
