Zoetis (NYSE:ZTS) didn't waste much time announcing its first dividend increase. Less than a year after being spun off from pharmaceuticals giant Pfizer (NYSE:PFE) in an IPO, the animal-health-products specialist recently boosted its payout by 11% to $0.072 per share. That was happy news for investors: Zoetis stock ticked higher on the announcement and added a few cents over the subsequent days. But is the optimism justified? Let's take a look as to whether the firm will be able to maintain that higher distribution.
A stock for beasts
In spite of the recent share-price bump and an impressive market position, Zoetis stock hasn't been one of the big IPO home runs of 2013. The stock was priced at $26 a pop for its market debut and opened at $31.50 per share. Prior to the dividend boost announced last week, the stock was changing hands at $32.17, hardly an impressive gain over its initial day of trading. Upping the company's payout could be an attempt at lifting that saggy share price -- although the increase was less than $0.01 and the dividend's yield (at 0.9%) remains thin, particularly in light of Pfizer's current 3.4%.
Fattening the dividend might also be a try at sweetening the stock in advance of looming competition. At the moment, Zoetis is the only pure-play animal-health-products company on the market. But it's likely concerned it won't stay that way. Merck's (NYSE:MRK) CEO recently said his firm was considering a similar spinoff of its animal-health operations. Meanwhile, scuttlebutt had it that Novartis (NYSE:NVS) would do the same, although recent media reports say the firm is now leaning toward unloading its non-human-goods unit to rumor-target-of-the-moment Merck, perhaps in the form of an asset swap.
Regardless, both rivals have robust animal-health operations. Merck's produced sales of $800 million in its most recent quarter. This is approaching the level of Zoetis, which booked just over $1.1 billion in its Q3. It's a little harder to tease out top-line figures for Novartis, since its animal-health offerings are folded into its consumer health unit. But considering the unit took in sales of $1 billion in its latest quarter, the take from products for beasts is likely robust.
A healthy bull?
It remains to be seen how the competitors in the herd sort themselves out. And while this positioning occurs, Zoetis has time to push ahead. Its recent fundamentals are encouraging, with quarterly top line continuing to grow (by 8% on a year-over-year basis to the aforementioned quarterly tally of $1.1 billion), particularly in markets overseas. The pipeline is flowing, with two branded and two generic medications approved for sale in the U.S. during the quarter, another one getting the green light in Canada, and a sixth receiving the nod from European Commission regulators.
The company is also shoring up its offerings by opening its wallet. In October, it inked an agreement to buy Advanced Food Technologies, a firm that in its words "provides innovative food safety and animal care products to meat and poultry processing customers." The terms of the deal weren't made public, and since AFT is a private company it's difficult to tell how well it's doing. But the smaller firm's synergistic value is obvious, and by making the buy Zoetis shows that it's determined to grow its business and shoo away competitors.
Keep an owlish eye on the numbers
Investors sniffing around Zoetis should bear in mind, however, that profitability has declined recently and the company has a big debt pile. Attributable bottom line slipped by nearly 20% on an annual basis to $131 million in Q3, affected by a proportional increase in selling, general, and administrative expenses. Meanwhile, long-term debt amounted to nearly $3.65 billion, against a cash and equivalents position of $389 million, although the bulk of that debt is in the form of low-cost senior notes with coupons under 3.3%.
That said, the company's fundamentals are generally good and it seems poised to keep its strong market position. Plus, as a young stock it has to keep its investors happy and show effort in supporting its share price. So, barring any disasters in the New Year, look for Zoetis to keep that dividend level, or even inject a bit more into its payout.
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Fool contributor Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.