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Dividend Investing Ideas Center
Aaron Levitt Jul 23, 2015
American’s love their fur-babies. Whether it’s cats, dogs or in some cases, anteaters, America’s pets have become an integral part of our family unit. So much so, that we are willing to spend big bucks taking care of them. And when there’s big-time consumer spending going on, there’s big-time profits to be had for investors.
Even so, the pet care sector is often ignored by portfolios—despite continual growth in spending. That leads to interesting value to be had, and potentially large dividends as well.
The web is littered with hilarious cat photos, videos and gifs. And no wonder, since there are about 218 million pets in the United States (and that huge number doesn’t even include fish). Owning those millions of cats, dogs and other animals is turning into an expensive endeavor. From food and veterinary care to chew toys and the multitude of accessories that come along with them, Americans are opening their wallets wide for their furry family members.
According to a report from BCC Research, Americans spent $56.4 billion on pet care products last year. That’s about $500 per household. What’s more, this spending per household annually is higher than what we spend on alcohol, residential land-line phone bills, and men’s clothing. BCC estimates that we’ll keep on showering Fido with the big bucks over the next five years. All in all, we are set to spend about $61 billion this year and $69.4 billion by the time the calendar rolls over to 2020. That’s a compound annual growth rate (CAGR) of 2.5% in that time.
With that growth—and those mega-dollars in mind—investors may want to consider some of the stocks in the pet care sector.
There are three major areas to look at: veterinary care, pet supplies, and retail.
As with human health care, costs in veterinary health care continue to rise. New therapies, drugs, and preventative measures are being adopted by doctors to treat pets all the time. As such, veterinary care has become one of the largest spending areas when it comes to owning a pet. The average family will spend approximately $150 per year in vet care. That figure doesn’t include one-off surgeries or other major vet expenditures that can cost thousands. As such, stocks that provide supplies, drugs, and other equipment to vets and clinics have been raking in the dough.
Merck & Co. Inc. (MRK ): While this pharma-giant is mostly known for its human drugs, MRK is a big-time player in veterinary medicine. In fact, it’s actually the largest by revenue. Their products cover everything from companion animals to livestock—including alpacas. With spending on animals only rising and not subject to the provisions of government health care, the stream of health care revenue—upwards of $1 billion per quarter—provides a backstop to the firm’s healthy dividend.
Zoetis Inc. (ZTS ): Spun-off from Pfizer (PFE ) back in 2013, Zoetis is the only pure-play drug manufacturer focusing on animals. The firm sells more than 300 different drugs across various vaccines, medical feed additives, anti-infectives and parasiticides. ZTS does offer products for dogs and cats, but its main bailiwick, livestock and swine vaccines, really bring home the bucks. More than 64% of its revenue is supported by farm activities. While its dividend is $0.33 on an annual basis (paid quarterly), it is growing and will grow as we continue to spend more on pet care.
Patterson Companies, Inc. (PDCO ): Getting all of these drugs, equipment and other disposable supplies into the hands of vets is the job at Patterson. PDCO is one of the largest distributors of veterinary supplies in the U.S. and the U.K. That position helps Patterson throw off a lot of cash flows. Those cash flows have been put to good use by making acquisitions in the space; it also helps pay its $0.88 dividend (paid quarterly). The company increased its dividend from $0.1 in 2010 to $0.22 in 2015.
Sanofi (SNY ): The French multinational pharma company also does its bit for your pets. Its products eliminate flees and ticks and also serious conditions, such as heartworm, from your household friend. The company also focuses on stock breeders and poultry producers as well. Sanofi is the only ADR listed in the U.S. markets that has a part of its business in animal health.
Just like we need to eat, brush our teeth, and shampoo our hair, our four-legged friends need to do so as well. The consumer staples of the pet world: kitty litter, food and the like, continue to see rising revenues. In fact, consumers spend more per year on pet food than they do on breakfast cereal. Adding to that growth are increases in purchases related to natural pet care; organic pet food and natural non-toxic supplies are the quickest growing sub-category.
The J. M. Smucker Company (SJM ): Smucker’s is mostly known for its jellies and stable of coffee brands. At the same time, the ink has barely dried on the deal that will make them one of the largest producers of pet food. The firm paid $3.2 billion for Big Heart Pet Brands. Big Heart owns such popular brands as Milkbone, Meow Mix, and Pup Peroni, as well as several natural brands. All in all, the deal should help SJM deliver on increased cash flows and pad its annual payout of $2.56 (paid quarterly). The company has a 13-year growth rate in dividends from 2002 to date.
Church & Dwight Co. Inc. (CHD ): Arm & Hammer is a household name and CHD has expanded that brand into the pet business. The firm markets a variety of products (most notably kitty litter) under this umbrella. However, it also manufactures a whole host of animal nutrition additives and products that are used by dairy farmers and feed suppliers. This under-the-radar business churns out steady profits. CHD has a nine-year dividend growth history to date.
Colgate-Palmolive (CP ): Under the subsidiary Hill’s Pet Nutrition, CP has three brands: Science Diet, Prescription Diet and Ideal Balance. However, the Science Diet brand seems to have lost its appeal with Americans as pet parents now want their pets to have meals that match their own in quality, and Science Diet products were factory made. This giant has increasingly been challenged by smaller players in the industry as they have failed to understand shifting consumer tastes.
In the go-to days of the late 1990s and early 2000s, chain specialty stores were all the rage—that included pet care. These days, the two biggest pet retailers have been taken private and there’s only one real way to play the retail side of the pet care industry.
PetMed Express, Inc. (PETS ): PETS operates a retail website that allows customers to buy various pet medicines at discount prices and has proven to be a successful venture. The company offers one of the most generous payouts in the entire pet care sector at $0.72 (paid quarterly).
FreshPet (FRPT): FreshPet is a manufacturer of fresh, refrigerated pet food distributed across North America. The company is new on the block and had a great listing—giving a 19% first day gain on November 7, 2014. A big component of their marketing, and overall business model, is their focus on healthy ingredients (their products do not use preservatives). While most dry pet foods can last on shelves for years, FreshPet products have a roughly 20-week shelf life (140 days). Investors looking to tap into fledglings in this growing industry might want to consider FRPT.
Petsmart (PETM ): From dog harnesses and feeder bowls for your pets to “pet books for pet parents”, Petsmart provides 11,000 distinct items in its stores—and 9,000 additional items on petsmart.com. If you have a pet, you’ve most likely been a Petsmart consumer at some point in time. If you want to invest in companies where you shop, then Petsmart has some interesting points that you should know: the dividend payout is low but the company made a stock buyback of $130 million in 2014. The company also has a successful pet grooming service that is cheaper than private shops.
Americans can’t say no to their pets. Spending on our dogs, cats, and other four-legged friends continues to rise to staggering levels. The previous picks are just some of the ways to get your yield fix. With billions in spending, and billions more to come, there are plenty of opportunities for investors—especially those looking for long-term dividend income.
Image courtesy of Witthaya Phonsawat at FreeDigitalPhotos.net
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Check out the securities going ex-dividend this week with an increased payout.
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