This stock is good for the long term, but it hasn’t been doing well lately.
Whether you’re a loving dog mom or a tough-minded cattle rancher, you’ll probably agree that animals need health care just like we do. Zoetis (ZTS 0.63%), a multinational pharmaceutical company that only makes medicines and other healthcare items for pets and livestock, is here to help.
This company has a lot to offer investors of all kinds because it has been making and selling things like painkillers for pets and diagnostic tools for veterinary clinics for a long time. Take a look at these three reasons to buy Zoetis to see if it’s a good choice for your portfolio. Then, let’s look at one reason why you might do better to sell it.
It is the biggest fish in a lake that is getting bigger.
The best reason to buy Zoetis stock is that the company is set up to continue its long-term trend of getting into its markets faster than its competitors. It is already the biggest competitor in the global market for animal health products that can be given to pets, fish, pigs, and cattle. The company’s management thinks that the total size of the animal health market it can reach is about $45 billion. And over the last 20 years, that market has grown by an average of 5.8% per year.
Since 2017, Zoetis’ operational revenue has grown faster than the growth of its markets. This means that the company has steadily gained market share. With a few recent regulatory approvals around the world for its arthritis and antiparasitic medications for pets and livestock, and more on the way in 2023, this trend is likely to continue.
Also, in the last 12 months, Zoetis spent only $529 million on research and development (R&D) out of just over $8 billion in sales, so it won’t cost too much for the company to keep making new treatments, vaccines, software packages, and other animal health technologies for the foreseeable future.
Its margins are getting even wider
Zoetis is making money, and it’s making more and more money over time. This is usually a very good sign for investors who are thinking about buying a stock. Today, its quarterly profit margin is 26.4%, which blows competitors like Elanco Animal Health out of the water because they don’t make money.
One reason why its margins are growing is that veterinary clinics are making more money as the number of treatments they offer grows. They are also getting pet owners to spend more money per visit than they used to. And as Zoetis keeps making new products for veterinary clinics and other customers, its margins could keep growing, though probably not very quickly.
Also, some of the company’s newer products, such as its software for analyzing cattle ranching, are probably more profitable than its traditional line of pharmaceuticals.
It has raised dividends in the past.
Zoetis has a forward dividend yield of about 1%, which won’t do much for the value of your portfolio in the first year. However, the company has a history of increasing its payout, so it’s likely that holding on to its shares will give you more and more cash over time.
In just the last five years, the payout has gone up by 198%, and there will be another 15% increase in 2023. Since Zoetis only gives out about 28% of its earnings as dividends, it has a lot of money to keep raising the dividend.
Also, the company’s management puts a high priority on giving money back to shareholders, spending nearly $1.4 billion over the past 12 months to buy back shares.
But, like all businesses, this one has its flaws, so let’s look at one reason why you might want to sell your shares if you already have them.
Headwinds could last for a while in the near future.
Even with these good things, Zoetis stock has lost about 24% of its value in the past year, and the next year might not be much better.
In Q3, the company had to lower its original estimate for 2022, which was at least $8.3 billion, to a new lower limit of $8 billion. The poor performance is blamed on a lack of skilled veterinary workers, problems in the company’s supply chain, and a harsh foreign exchange rate environment.
Due to the size of its business, all three of these problems are likely to keep bothering shareholders for longer than they would like. It’s likely that these problems will go away in about a year. Zoetis will be in stormy waters until then, which could be enough for shareholders who need their money quickly to sell their shares.