Beat the Dow Jones with dividend stocks that pour out cash
Having doubled the Dow Jones total returns in 10 years, Zoetis appears poised to outperform over the next decade.
After the spin-off Pfizer 2013, a giant in animal health care zoetis (ZTS -0.29%) As an independent business, operating cash increased nearly fivefold. With a variety of animal health products serving both the pet and livestock industries, Zoetis has become a solid, cash-generating dividend stock.
Gaining a leadership position in a recession-resistant industry has helped the company more than double its total revenue than before. dow jones Despite these impressive achievements, here’s an example of why Zoetis may not be the best yet. Zoetis becomes a top dividend stock to consider in your quest to beat the Dow.
Dominate the animal health industry
Zoetis generates 65% of its sales from pet products (dogs, pets, horses) and 34% from livestock products (cattle, swine, poultry, fish, sheep). A leader in the animal health care industry, Zoetis already derives 90% of its sales from market-leading species. Likewise, the company ranks first in the markets of North America, South America and Asia and is the second largest animal health care company in Europe.
Despite this market leadership, Zoetis is not resting on its laurels, spending more than $5 billion on research and development (R&D) since going public. Thanks to this constant innovation, the company’s R&D team has brought more than 300 new product lines to market, establishing two therapeutic segments in dermatology and parasitology that now have combined sales of $3 billion.
In addition to these new therapeutic areas, management believes it has found its next billion-dollar niche in helping dogs and cats with osteoarthritis (OA) pain. Zoetis, which recently launched Librela for dogs and Solensia for cats, aims to help around 40% of both breeds have clinical signs of osteoarthritis pain. Worse, 80% of dogs over the age of 8 and 90% of cats over the age of 12 battle osteoarthritis pain, making this new medication a necessity for many loving pet owners.
The company recently received a negative response from the European Medicines Agency, which cited more than 20,000 adverse events linked to Zoetis’ OA drug, but CEO Christine Peck said the adverse event rate was only 0.18%. Fears of these side effects appear to be exaggerated, as 78% of U.S. veterinarians are “very satisfied” with Librela and European veterinarians gave the drug an 8.6 out of 10 (the highest score of any OA drug).
With Librela and Solensia growing a combined 126% during the company’s first quarter of 2024, pet owners seem more than happy to throw their wallets in favor of the new drugs. Executives explained that side effects from the drug continued to occur in April, shortly after the negative report. Acceleration Growth compared to the first quarter.
Image source: Getty Images.
Strong cash flow, dividends, etc.
With a diverse and fast-growing range of pet products and a steady Eddie livestock division, Zoetis has turned into a highly profitable cash-generating machine.
ZTS Profit and Owner Cash Profit Margin (FCF Margin) data from YCharts.
Free cash flow (FCF) margin has lagged net profit margin over the past few years, but is still exceptional at 22%. Much of this gap between the company’s two margins is directly related to surging capital expenditure spending used to build global manufacturing capabilities, open new labs, and purchase equipment for R&D.
ZTS CAPEX To Revenue(TTM) data from YCharts
Over time, this spending will roll back to lower levels, boosting the company’s FCF numbers and allowing management to return more money to shareholders through share buybacks and dividends.
Zoetis has an excellent track record of rewarding shareholders, quintupling its dividend over the past decade and purchasing 1% of its outstanding shares each year during that time.
ZTS shares open interest and dividend data from YCharts.
Currently paying a 1% dividend yield using only 30% of total net income, the company has plenty of room to continue growing its dividend well into the future while steadily buying back shares.
With the animal healthcare industry expected to grow by approximately 5% per year over the next decade, Zoetis is well-positioned to continue to succeed with the ‘humanization of pets’ megatrend. Outpacing the growth of the broader animal health care industry over the past decade, this company looks like a quality cash-generating dividend stock that could easily continue to outperform the Dow Jones.
