Jonathan Nurick from DivGro, talks about the potential of Zoetis (NYSE: ZTS), a leading company in the animal health industry, that was once a division of the pharmaceutical giant Pfizer. Jonathan shares his bullish sentiment on Zoetis' performance, highlighting its promising trajectory of dividend growth since its inception in 2013. He expects this growth trend to persist, underlining the close correlation observed between the company's dividend rate and its share price over the past decade.
One of Zoetis’ competitive advantages is the predictability of the animal health market, with pet owners' growing willingness to spend on their pets' welfare across generations. Jonathan cites a significant increase in veterinary expenditure, which benefits the company.
He further appreciates the efficiency and affordability of bringing animal healthcare products to market compared to human healthcare counterparts, giving Zoetis a competitive edge. He also mentions a kinship between Pfizer and Zoetis, with the latter repurposing the former's solutions, which gives Zoetis advantageous positioning.
Discussing the resilience of Zoetis’ market, Jonathan anticipates that even in an economic slow down, the company's earning potential remains robust. He presents his conviction that the increasing bond between pets and their owners will cushion spending on pet healthcare from economic pressures.
Finally, Jonathan talks about his method of profiling a company for its dividend growth potential. He takes into consideration aspects such as the growth in units sold, the ability to increase price, and the importance of a product to the consumer.
Find the full unedited transcript of this interview below:
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Let's now focus on dividend growth. That's exactly what Jonathan Nurick from DivGro is doing right now. He joins us. Jonathan, good to see you again. Thank you very much for having me. Now we're going to talk about one of your largest holdings at the moment, which is the the American company Zoetis. So this is animal health care and what's spun out from Pfizer. Correct. So Pfizer used to have a division called Pfizer Animal Health, which they've been running since the 50s. But Pfizer saw themselves as a human health solution provider. People are obviously very familiar these days with Pfizer because of their involvement in in Covid and in some respect, getting past Covid. And in 2013, they decided to spin out the division Pfizer Animal Health and called it Zoetis. And spinoffs are often a very fertile ground for finding very attractive dividend growers, because they can be an exceptionally high quality
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business that just wasn't getting the love and attention and sometimes capital that it needed to grow fruitfully, independently. And so Zoetis came public in 2013. Most of our holdings have a very, very long history of dividend growth. We once covered together a company with more than 60 years, but so what is today has grown to 20 2023 since 2013, its dividend a rate of 18.4% per year. We obviously think that will continue. And just as we always expect that there's a relationship between the rate of change in the dividend and the rate of change in the price, the price has responded by also going up 18% a year over those ten years. Okay. I guess the question is what what's to come though?
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Are you expecting that momentum to continue in terms of its growth? I'm just taking a look at what from the third quarter
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revenue, 2.2 billion growing at 7% net income. They're also up
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13% operational growth. All the metrics there is going in the right direction. But from your point of view, dividend growth. That's right. So everything to be able to power dividend growth, everything up the chain needs to work to fund rapid dividend growth. You need rapid profit growth. And to get rapid profit growth you usually need at least substantial sales growth. And what we like about Zoetis in particular is that animal health is very, very predictable. Just like humans, animals develop ailments at more or less predictable rates. But the bond between human and animal is getting stronger with each generation and the inclination to spend behind the well. The welfare of your pet is simply going up with each generation. And you mentioned the last quarter, and the last quarter of vet visits didn't change much, though they're on an upward trajectory over time. But the expenditure at the vet, which is playing into Zoetis hands, is going up fairly markedly. And the beauty in animal health care is
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that, unlike in the human health care space, where it's very, very difficult, expensive and takes a long time to bring a drug to market, the animal health care space is simply easier. There's a lot of human health that has already been solved, and you can take some of those products. In the case of Zoetis, you obviously have the previous relationship with Pfizer and you can repurpose them. And studies are cheaper and quicker to put together because it's easier, for example, to get subjects, keep them on the same diet. ET cetera. Where it's obviously quite hard to put together
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a test in the human health care. And because the animal marketplace for each given ailment or solution is much smaller in total dollars than the human equivalent, there are fewer competitors. Quite often you find that once somebody conquers a space, and in the case of Zoetis, they have 15 blockbusters, which is a drug where they do more than $100 million a year in sales, there's virtually no competition because there isn't enough market to come and compete. Well, I mean, certainly as a dog owner myself, for the family can attest the fact that it is a huge market, the amount of money you can spend on pets. So, Jonathan, what are you looking for then potentially, given that when we look at the pet industry obviously benefited in the height of Covid when there was a boon in terms of acquiring pets, if we do happen to see recession or at least
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slow economic growth, is it going to slow to the point perhaps where that's going to affect the earnings outlook for Zoetis, our view is that it's very unlikely that that that would happen, because when we study the pet population in all developed countries, they trend upwards. Sometimes they plateau, but they don't trend downwards even when people fall in economic times, every study that we look at points to the bond increasing that the animal is becoming increasingly a fully. Fledged member of the family. And while people pull back on, let's call it luxuries in the pet space, they might hold back some toys or go down to a less expensive food, or do a little bit less what they might call wellness or grooming. They don't go back on spending for things like arthritis dermatitis, because they look at what is a loved one in their family and they don't want to take that away. Importantly, unlike in human health, where if you go to the doctor, the doctor prescribes and you then go to the
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pharmacy where there's a channel where you buy your product, and often they might suggest the generic the cheaper no name brand. And often the government sponsors that activity. In the case of the vet, the veterinarian is not only the recommended prescriber, but usually also the retailer and administrator of the drug. They're often injectables. And so what you have is a vet that is very financially incentivized to both look after your pet better, but to continue prescribing for the proper treatment of your animal. We've conducted studies and looked at others by other people that demonstrate that people who've fallen hard times to your question will much more quickly switch from a streaming or cable TV program, or reduce their frequency of going out to restaurants or something like that, and favor the health care of the pet. So we're pretty confident that
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together with our R&D pipeline activities, which is very fruitful, they just brought out what they believe will be the largest, best selling drug for animals ever, which has just launched, is going fantastically, but that the existing ecosystem is going to sustain itself and grow, whether we have good or bad economic times ahead. Jonathan, what do you look for? The signs, perhaps, of dividend growth likely to slow when you're profiling a company looking at to add it to your portfolio? So what do you use? Most importantly, we like to see an installed base. They installed. Base can either be contractual or it can be pragmatic. And in this case we have an installed base of pets. We know more or less how many pets there are in in each country that discloses that information. And most do we know the trajectory of them. We know how many vets there are, and being the number one drug in most of its chosen lines, and often the number
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one and number two, because they might have an injectable and a chewable, we can see the process by which Zoetis will grow its sales, and then we break sales growth down further. What we want to see is an increase in units sold and an ability to increase price. And zoetis is growing the number of drugs dispensed. And because they're often a market of one, they can increase the price. We're very wary of companies that aren't able to sell more of what they make. They're simply exercising the price lever, because that means that at some point they might run out of that capacity and the customer might push back. We saw a lot of that in the recent bout of inflation, where a lot of companies increase their price indiscriminately, and the customer simply walked away. So we're looking for volume growth for something that is very important, ideally a small purchase that's happening often, but it's very high value to the consumer.