It's Official: Zoetis Belongs In Your Dividend Growth Portfolio

| About: Zoetis (ZTS)
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Summary

Zoetis raised its dividend 15%.

Zoetis forecasts "adjusted" earnings growth of 11%-16% over the medium term.

Zoetis remains a high-conviction stock for me.

Introduction

In my previous article about Zoetis (NYSE:ZTS), I talked about its strengths and described the positive long-term outlook ahead. Since that article was written at the end of October, several events have occurred that reinforce this positive long-term outlook. We will discuss those events here.

Nov 4th: Zoetis 3rd Quarter Earnings Report

Zoetis' 3rd quarter revenue of $1.2 billion increased 10% over 3rd quarter 2013. Its GAAP 3rd quarter EPS of $0.33 increased 27% over 2013. Zoetis had a great quarter.

Zoetis reaffirmed its 2014 full-year guidance "adjusted" EPS midpoint of $1.52 per share. Usually, I don't take comfort in "adjusted" EPS figures. However, due to Zoetis' stand-up costs as a result of the separation from Pfizer (NYSE:PFE) through 2015, Zoetis' GAAP earnings will catch up to its "adjusted" earnings over the next few years. Therefore, it makes sense to me to calculate P/E values based upon its "adjusted" EPS values.

Nov 12th: William (Bill) Ackman Confirms Zoetis Stake

Bill Ackman's Pershing Square hedge fund disclosed a 8.5% stake in Zoetis. Zoetis' stock price subsequently jumped 9% on the news. This helps confirms my positive thesis. There are rumors of Ackman attempting to have an outside company come and buy Zoetis, but I don't see that likely to happen anytime soon.

Zoetis is selling at >25 times 2015 "adjusted" earnings. Although Zoetis has great growth ahead of it, I highly doubt any large pharma company would be interested in purchasing Zoetis in the range of 25-30 times earnings. Pfizer tried to sell Zoetis before it was spun off, to no avail.

In fact, Ackman's stake is the biggest risk I see with Zoetis. The worst thing he could do is to attempt to replace the current management at this time. As a stock owner, I want my management team to focus on the core business and not have to constantly be worried about their own self-interest. Anything that draws the management's attention away from the company's core business is a potential pot hole for me. I hope he sits quietly, as Zoetis' management has a plan in place to grow earnings at a faster clip than most companies (11%-16%).

Nov 17th: Zoetis Purchases Abbott Animal Health Assets

This $255 million purchase is a decent sized bolt-on acquisition for Zoetis. The Abbott assets consist of companion animal products and diagnostics. This should be completed in the 1st quarter of 2015. No financial terms were disclosed.

Nov 18th: Zoetis has 1st Investor Day Meeting

This was a great presentation and I recommend all current and prospective investors to take a look at it. Some of the highlights include:

- The animal health industry is projected to grow in the mid-single digits over the long term.

- Zoetis' sales goal is to grow in line with or faster than the industry.

- Zoetis intends to grow net income faster than sales.

- Top 25 products have been on the market for an average of 27 years!

- Projected 2015 "adjusted" EPS of $1.64.

- Projecting 11%-16% "adjusted" EPS growth over the next 3 years.

- Authorized first-ever share repurchase program of $500 million.

Dec 2nd: Zoetis at the Piper Jaffray Conference

The transcript of Zoetis at this conference helped further explain many items from their investor day, but I wanted to share one specific quote regarding returning capital to shareholders. This is Zoetis' CFO, Paul Herendeen:

"Now, to the extent that we don't have those opportunities (M&A), then our view is that we look to return capital to shareholders, and we do that in two ways. We have an ordinary or regular dividend, that we have stated, we expect to grow broadly in line with our growth of adjusted net income. And then we did announce a $500 million share repurchase program, and we'll use that as a lever when we don't have other uses for our cash to return capital to shareholders."

I added the bold for emphasis. Mr. Herendeen wants Zoetis to be a dividend growth company.

Dec 17th: Zoetis Increases Quarterly Dividend by 15.3%

In my previous article, I predicted that Zoetis would provide a 13.8% increase in dividend per share on December 18th. This is their 2nd dividend increase in the 2 years since becoming a stand-alone company. I further expect healthy dividend increases every December for decades to come.

Valuation?

On December 17th, Zoetis had a closing price of $41.14.

Dividend Yield 0.8%

2014 Adjusted P/E = 27

2015 Adjusted P/E = 25

For now, Zoetis is a HOLD. For Zoetis, a P/E range of 20-25 seems to be fair value and it's currently slightly above that range. I'd recommend buying with a margin of safety, which means waiting until it goes back to the mid-$30s. Keep it on your watch list.

References

Quarterly Earnings Release

http://investor.zoetis.com/press-release/financial/zoetis-reports-third-quarter-2014-results

William Ackman Stake

https://seekingalpha.com/news/2118605-ackman-confirms-zoetis-stake

Zoetis Takeover Rumors

www.valuewalk.com/2014/11/ackman-zoetis-.../

Abbot Animal Health Purchase

http://investor.zoetis.com/press-release/financial/zoetis-purchase-assets-abbott-animal-health

Investor Day Meeting and Presentation

http://investor.zoetis.com/zoetis-investor-day-2014

https://zoetis.investorhq.businesswire.com/sites/zoetis.investorhq.businesswire.com/files/doc_library/file/Zoetis_Investor_Day_2014_111814.pdf

Zoetis at Piper Jaffray Conference

http://investor.zoetis.com/sites/zoetis.investorhq.businesswire.com/files/event/additional/Zoetis_at_Piper_Jaffray_Conference_Transcript_12.3.14.pdf

Zoetis Increases Quarterly Dividend

http://investor.zoetis.com/press-release/financial/zoetis-declares-first-quarter-2015-dividend-board-approves-15-payment-increa

Disclosure: The author is long ZTS, PFE.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.