Zoetis (ZTS)

The five boxes

• Pays: 13 years of dividends since the Pfizer spin-off, never cut. 16/20
• Raises: 13 straight annual increases, every year since the first full year as a public company. 16/20
• Safe: the $2.12 annual dividend is about 35% of trailing earnings. The dividend could be covered nearly three times over. 20/20
• Undervalued: today's yield is roughly three and a half times the stock's own five-year median. More on that below. 20/20
• Yield that matters: 3.04% at our fill price. 16/20

Total: 88, Strong.

How a 3% yield can be "undervalued"

Three percent does not sound like a bargain next to Realty Income at 6% or Nike near 5%. The Undervalued box does not ask what the yield is. It asks what the yield is compared to what this stock usually pays.

We ran the same calculation we did for Bank OZK and Lowe's: 1,254 daily closing prices over the past five years, every dividend paid along the way, and the trailing yield on each day. For Zoetis the five-year median is 0.89%. For most of that stretch the stock traded between $150 and $200 while paying $1 to $2 a share, and investors were happy to accept a yield under 1% because the business was growing so fast. Today you get 3.04%. That is the biggest gap between a stock's current yield and its own history that we have ever measured, and it says the market has repriced this company more sharply than anything else we own.

Why it is this cheap

Zoetis is having its first genuinely bad year as a public company, and we want to be plain about it.

Its best-selling dog medicines face new competition. Elanco and Merck have both launched rivals to Apoquel and Cytopoint, the allergy drugs that drove much of Zoetis's growth, and the company lost share faster than it expected. Librela, its arthritis injection for dogs, has had safety concerns in the United States and some vets stopped starting new patients on it. In August the company cut its full-year sales and earnings guidance, the stock fell hard, and Morningstar cut its fair value estimate from $140 to $102 while noting that a company that "has rarely made a misstep" had been caught flat-footed.

Here is what we weighed against that. Morningstar still rates the business a wide moat, its highest grade, because the company's return on invested capital stays in the mid-20s even in the bad scenario. Its balance sheet carries under two years of earnings in net debt. And the dividend, at 35% of earnings, has enormous room even if profits fall further than the pessimists expect. Morningstar's own forecast has the dividend rising from $2.12 this year to about $2.58 by 2030. At $69.67 we paid about 68 cents on the dollar of their fair value estimate.

The honest part

This is the shortest dividend record we own. Thirteen years is respectable, but it is not a Dividend King or an Aristocrat, and two of our five boxes are 16s because of it. The company has never been through a dividend-threatening downturn as a public company. This is the first real test.

Growth is slowing. Zoetis raised its dividend 15% or more in each of 2023, 2024, and 2025. This year's raise was 6%. For the income projection we stored 6%, not the recent average, for the same reason we gave with NextEra: we project what the company is doing now, not what it did when times were good.

Earnings are falling this year, and competition is not going away. If the companion-animal business shrinks more than the roughly 8% Morningstar now models, the stock can go lower from here. We hold it either way, and we will tell you.

Why not double down on Nike?

A fair question came up this morning, and we want to answer it in public because it is exactly the kind of decision the five boxes exist for.

Nike, our week nine pick, opened today at $33, down about 20% from our August purchase and within a few percent of its 52-week low. Last week we bought more Lowe's on the logic that a good buy at a higher price is a better buy at a lower one. Why not the same for Nike?

Because for Lowe's the lower price changed the scorecard, and for Nike it does not. When Lowe's fell, its yield crossed from under 2.5% to over it and the score went up. Nike's yield was already near 4% in August and already scored a 20 on both Yield and Undervalued. A lower price cannot raise a box that is already maxed. What holds Nike back is its Safe box: the dividend takes about 79% of trailing earnings, and that did not improve with last week's quarterly report. So Nike scores lower than Zoetis today, and a fourth buy into consumer discretionary, already 23% of the portfolio, is the opposite of what we said we would do last week.

Nike could well be the right buy later. Its 25th consecutive raise is expected in December, which would lift its score. We will run the numbers again when that happens.

A correction to our August Nike post

In working through that comparison we found a mistake of our own. In week nine we called Nike "a 25-year Dividend Aristocrat" and scored its Raises box a 20. We pulled Nike's complete payment history this morning, every quarterly dividend back to 1987, and counted the raises ourselves. Nike's quarterly rate stepped up every December from 2002 through 2025. That is 24 consecutive annual increases, not 25. The 25th is due this December, and only then would Nike qualify for the Aristocrat label.

Twenty-four years sits one year short of the 25-year line for a 20 in our published bands, so Nike's Raises box should have been a 16 and its August score should have been 84, not 88. We have recorded a corrected assessment dated today, the original stays in the record, and the portfolio page now shows 84. It changes nothing about owning Nike, which still passes all five boxes, but a number we published was wrong and now it is right.

Three more dividends, all back to work

Since last Tuesday the portfolio collected its first dividends from three more holdings: PepsiCo paid $1.06 on September 30, and ADP paid $0.68 and Nike paid $0.99 on October 1. Each one matched the rate the company had published, so no surprises. Together with the two cents left over from last week, that made $2.75 of dividend cash, and every penny of it went into this morning's Zoetis purchase alongside the $100 deposit.

Lifetime dividends collected now stand at $8.33, and all $8.33 of it is invested in shares that are themselves paying dividends. Nine of our fifteen holdings have now paid us at least once.

The numbers on this week's buy

• Invested: $102.75, the usual $100 plus $2.75 of pooled dividends, the fourth time our own dividends have helped pay for the week's pick and the largest dividend contribution yet
• Bought: 1.4748 shares at $69.67
• New annual dividend income added: about $3.13 per year
• The portfolio after 17 weeks: $1,700.00 contributed, $8.33 reinvested, worth about $1,582.11, throwing off about $59.51 a year, roughly $4.96 a month
• Fifteen holdings across ten sectors. Health care now has two names at about 13% of the portfolio. Technology is still the one we don't own.

The portfolio is worth about 7.4% less than we have put in, a little better than the 8% it showed before this morning's buy, and down from 6% under last week. Fourteen weeks of steady declines across the market have not been kind to a new portfolio, and that is fine. The income line went from $56.38 to $59.51 a year this week, and the more these businesses are marked down, the more income each $100 buys.

The running totals are on the portfolio page, and the slider lets you drag through time to watch the income grow.

That's week seventeen. A Monday buy, a new sector partner for Medtronic, and a mistake owned up to. See you next Monday for pick number eighteen.

This is not financial advice. We're individual investors sharing our own approach and the reasoning behind our own real decisions, not licensed advisors. We own, or are buying, the stocks we write about in this series. Do your own research and consider speaking with a financial professional before investing. Dividend figures, yields, share counts, and prices are accurate to the best of our knowledge as of the publish date and will change over time.