1 Magnificent S&P 500 Dividend Stock Down 12% to Buy After Its Recent Pullback

Zoetis (ZTS -0.45%) leads the global animal healthcare industry, offering medicines, vaccines, diagnostics, genetic tests, and other items for companion animals (pets) and livestock. Home to 15 blockbuster products that each earn over $100 million annually, Zoetis is a well-diversified behemoth with a history of stomping the market.

Since spinning off from pharmaceutical juggernaut Pfizer in 2012, the company has grown its shareholders’ initial investment by some sixfold, equating to an annualized total return of 17% over 12 years. Yet, despite recently beating analysts’ expectations for the third quarter on both the top and bottom lines — while also raising full-year guidance — Zoetis’ share price has slid 12% in the last month alone.

Here are three reasons why now is as good a time as any to buy shares of this magnificent S&P 500 dividend stock and hold them for decades.

1. Zoetis leads a resilient market

With two-thirds of its revenue generated from its companion animal group and the remainder from its livestock unit, Zoetis is a market leader across both industries. In fact, 90% of the company’s sales come from products where it holds a leading market share.

Not only does Zoetis dominate its particular product niches, it also does so globally, holding the No. 1 spot in the Americas and Asia while also being the No. 2 business in Europe. This powerful positioning gives Zoetis a wide moat around its operations, as it is tough for smaller firms to try to overtake the company’s vast reach.

Zoetis projects that the $48 billion global animal health industry will continue growing by roughly 5% through 2033, leaving plenty of steady growth ahead for the company. Since Zoetis has grown faster than the market every year for the last decade, the company’s outsize growth in a recession-resilient industry makes it an exceptional investment option.

2. Growing alongside the ever-strengthening pet-human bond

The most significant trend powering the company’s long-term growth ambitions is pet owners’ continually growing affection for their furry friends. Led primarily by millenials and Gen Z, this ever-increasing pet-human bond provides a lot of upside to Zoetis’ operations, as its most recent medicine launches help pets feel less pain and irritation.

Librela and Solensia, the company’s osteoarthritis (OA) offerings for dogs and cats, are quickly proving to be popular among pet owners. To highlight this point during the company’s third-quarter earnings call, management announced that its OA pain franchise delivered 97% growth. While Zoetis already helps over 1 million dogs, it estimates that 17 million more live with untreated OA, which affects roughly 40% of dogs.

The company’s parasiticide (for worms, fleas, and ticks) and dermatology (pruritic itching and allergies) offerings also benefit significantly from the strengthening of the pet-human bond. These two growth areas saw sales rise by 27% and 16%, respectively, during Q3, reinvigorating Zoetis’ growth story following the pandemic-aided boom-and-bust cycle from 2020 to 2023.

ZTS Revenue (Quarterly YoY Growth) data by YCharts.

With a 2020 Zoetis study showing that pet owners would refuse to spend less to take care of their pets even in the face of a 20% decline in their budget, the company’s new growth areas should also prove to be resilient.

3. Top-tier profitability provides strong cash returns to shareholders

Despite historically spending roughly 7% of its sales on research and development to create products for these new growth areas, Zoetis maintains a robust free cash flow (FCF) margin of 25%. Furthermore, the company’s 21% return on invested capital (ROIC) ranks in the top 20% of stocks in the S&P 500, which has proven to be an indicator of outperformance over the long term.

Thanks to this top-tier profitability, Zoetis has grown its dividend every year since it debuted in 2013, increasing its payments sixfold over that time. Despite this dramatic growth, the company only uses 33% of its FCF to fund its 1% dividend, leaving ample room for continued growth.

Last but not least, management has consistently repurchased about 1% of the company’s outstanding shares annually, juicing FCF-per-share growth for shareholders. Trading with a price-to-FCF of 34 compared to the S&P 500’s average of 32, Zoetis looks like a classic example of a high-quality operator that now trades at a fair price following the stock’s recent pullback.