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Going Whole Hog for Growth & Income

October 17, 2019

One of the most important things you can do to become a better investor is to get ahead of major economic and market developments.

Anyone can go down a list of dividend-paying stocks and pick a few, write them up and call it a day. But that’s not good enough for me, and it shouldn’t be for you, either.

If you do your homework, you can get ahead of big changes in the market, which will make a world of difference in your portfolio’s performance.

With that in mind, I identified a major market development earlier this year that represents the greatest threat to global food supplies in decades.

But I didn’t just discover a problem… I went a step further and found a solution, which I quickly shared with my subscribers at Profitable Investing.

The problem is African Swine Fever (ASF). ASF is a highly infectious virus that brings disease and death to pigs in only a matter of days.

After originating in Africa, it quickly spread to 50 countries, and that number is climbing rapidly. And while it has been denied by pig livestock producers in the US, it is here now and will be striking the pig market in a big way.

China has already been devastated by ASF. More than half of the nation’s pigs have been eliminated (that’s more than 300 million and climbing) between infection and culling infected pigs. As a result, pork prices have been soaring in China, so much so that the government has imposed price controls.

In the US, pork prices are up since late September by 13.09%, and this is before ASF really starts to hit the broader swath of US producers.

Live Hog Spot Price Advancing—Source: Bloomberg Finance, L.P.

In the June issue of Profitable Investing, I presented the key solution for healthier livestock. This company, a global leader in animal health medicines and vaccines, has generated a return of 25.95% since June. That’s more than 3.7 times the price movement of the S&P 500 Index over the same period.

Zoetis Incorporated (ZTS) is a Parsippany, New Jersey company that has more than 300 products in more than 100 countries, 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.

Furthermore, Zoetis is already in cooperation with the Chinese government and private livestock health projects.

Zoetis received two patents from the US Patent and Trademark Office to exclusively develop ASF vaccines late last year and is well on its way with needed products. Its strong history of vaccine development and sales means it’s on the front line for heavy revenue growth over time.

Over the trailing five years, ZTS has returned 275.81% compared to the S&P 500 Index’s 75.92% return and the S&P 500 Health Index’s return of 63.97%.

Zoetis Total Return Compared to S&P 500 and S&P 500 Health Indexes—Source: Bloomberg Finance, L.P.

Beyond livestock healthcare and vaccines, Zoetis is also a leader in pet health and related medications. And with rising demand for domesticated animals around the globe, the company has been serving the growing market 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 equity at 62.80%.

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 therefore ample, with the company’s balance sheet showing a current ratio of 3.60, which measures short-term cash equivalents against short-term liabilities. With heavy cashflow and controlled debts to assets at 59.90%, it has the ability to easily borrow if needed to fund development.

This sort of company doesn’t come cheap, however. It’s valued at a price to trailing sales of 10.20 times. But that underlying revenue has continued to surge over the past 10 years by 57.38%, providing proof of the value proposition in the health technologies developed in its labs and in the field. And with its ASF vaccines, I expect revenues to rise further.

Zoetis Revenue on the Rise—Source: Bloomberg Finance, L.P.

With that, I continue to recommend buying Zoetis, ideally in a tax-free account.

The dividend is modest given the retention of profits to fund development, with a yield of just 0.51%. But the company has been increasing its distribution by an average of 17.07% over the past five years, which reflects the retention and reinvestment of earnings for development of new products, including ASF-fighting vaccines.

But there’s also another company inside Profitable Investing with a key provision for slowing the spread of ASF in the US. It is up handsomely since being added to the model portfolios but has more room to run.

I’ll be covering it in detail in the November issue of Profitable Investing. You won’t want to miss it.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing