The Year of the Pig is Leading to Great Total Returns
June 06, 2019
Pigs are big business. According to the US Department of Agriculture (USDA), global pork trade for last year was 8.5 million metric tons, up 21.80% from just five years ago. For 2019, it’s projected to increase by another 3.00%.
But there’s a pressing threat to pork supplies right now. Pigs are dropping dead around the globe from African Swine Fever (ASF). This disease is not contagious to humans, but it is deadly for pigs. And they can contract it easily in pens and open fields.
The United Nations’ World Organization for Animal Health has been identifying and tracking the disease throughout much of Eastern Europe into Eurasia as well as in pockets of Sub-Saharan Africa. But the epicenter of the crisis is in Asia, specifically China.
China has culled 20% of its pig population in just the first quarter of this year. And the USDA is confirming that Chinese pig production will continue to be down for 2019 and beyond by 20% or more. Outbreaks have been reported in 32 provinces in China. That’s a big deal, since China raises 50% or more of the global supply of pigs.
Ironically, 2019 is the year of the pig in the Chinese Zodiac. And while many in the US might be ignoring this crisis since it hasn’t hit US farms, it’s resulting in record sales of pork from US producers to China. In the most recent weekly customs data, China imported 31,160 tons of US pork, which was the greatest weekly sum since April’s high of 77,700 tons.
In addition, given the concerns over livestock health, China is also importing record amounts of beef.
Pig Prices are Flying
US Lean Hogs Spot Price—Source: Bloomberg Finance, L.P.
It’s no surprise then that US wholesale pig prices are soaring. Year to date, prices are up 50.97%.
That’s a bull market for pigs.
The key solution for healthier swine and other livestock is animal medicines. And I’ve found a stock that provides both dividends and growth that’s a global leader in animal health medicines and vaccines.
Zoetis Incorporated (ZTS) is a Parsippany, New Jersey-based company that has more than 300 products that are in rising demand in more than 100 counties, including China. And before you question whether China might impose tariffs or restrictions on Zoetis, remember that China is in crisis mode when it comes to its livestock production.
Case in point: Zoetis has already received two patents from the US Patent and Trademark Office to exclusively develop ASF vaccines last year. And the company is well on its way with needed products.
Plus, Zoetis is a proven strong performer. Over the trailing five years, the stock has turned in a return of 258.11% as compared to the S&P 500 Index’s 60.89% return and the S&P 500 Health Index’s return of 62.73%.
Zoetis Zeroes in on Performing
Zoetis Total Return vs. S&P 500 & S&P 500 Health Indexes—Source: Bloomberg Finance, L.P.
Beyond livestock healthcare and vaccines, Zoetis is also a leader in pet health and medications. And with rising demand for domestic pets, the company is very involved in providing products to keep them healthier and happier for longer.
Revenues are up over the trailing year by 9.80%. And operating margins are very fat at 31.10%. This results in a whopping return on shareholder’s equity of 64.90%. It retains the bulk of its profits at a rate of 81.70%, which in turn is channeled into drug, vaccine and other animal health products to support a robust pipeline of new revenue sources.
Cash is ample, with the company’s balance sheet showing a current ratio of 3.60, which measures short-term cash equivalents against short-term liabilities. And with heavy cashflow and controlled debts to assets at 59.90%, it has the ability to borrow if needed for R&D or acquisitions.
Zoetis Revenue Proves to Rise
Zoetis Revenue Flows—Source: Bloomberg Finance, L.P.
Zoetis is a great play on the animal health sector and should ideally be purchased in a tax-free account. The 0.60% dividend is modest because it hangs on to profits to fund development. But it’s increased by 16.18% on average over the past five years.
And if you’re looking for more income to go with great growth, I have additional opportunities that you can read about in my Profitable Investing advisory.