Pet Industry Dividend Investing
One thing that is almost a certainty during good times and bad is that pet owners will continue to pamper and spend on their furry friends. In fact since 2010 the annual expenditure of pet related products and services has topped $50 billion in the United States alone. It is estimated that over 80 million of us have at least one pet in our household. That’s a big market. Think about all the care that your pet requires on a regular basis from grooming supplies, food and nutrition to toys and veterinary care. Did you know that a lot of the companies that supply these goods and services pay dividends? Let’s take a look at some of the pet industry dividend players.
First up in the retail segment of the pet industry is PetSmart, Inc. (PETM). A retail outlet that doesn’t really need any introduction, after all, who hasn’t walked into one of their retail locations to merely browse, currently yields 1.40% with a very low payout ratio of only 18.0%. This dividend is very safe. PETM has been growing its dividend for the last 5 years but has a very impressive 10 year annualized dividend growth rate of 38.65%. That’s a rocket ship of growth! On a valuation basis PETM is only at a 14.5 PE which is cheap compared to the S&P and is also well below industry peers. PETM, though currently a low yield stock, does offer some impressive potential dividend gains in the future.
Next in the retail space is PetMed Express, Inc. (PETS). PETS does business under the familiar name 1-800-PetMeds that supplies prescription and non-prescription pet medications, health products and more in the United States. PETS currently offers and very high yield of 5.10% with a relatively high payout ratio as well at 77.3%. While relatively new to paying out dividends, having started in 2009, PETS does offer current value in today’s high priced stock market. The PE of PETS is 14.49, which like PETM, puts it well below the S&P and industry peers. Could this be a high yield value stock at current levels? Perhaps.
Of course, our pets get sick every now and then and need the veterinary care of Patterson Companies, Inc. (PDCO). PDCO serves as a leading distributor of supplies, equipment, vaccines and pharmaceuticals in the U.S. and the U.K. for pets, equines and clinics. PDCO currently yields 2.00% with a low payout ratio of 35.4% making this dividend safe based on current cash flow. Like PETS, PDCO is a relatively new dividend payer having started distributions in 2010. However, despite its relatively short time of having paid dividends, PDCO has doubled its payout from $0.10 to $0.20 in just four years. Another rocket ship dividend grower. Of course, this type of dividend growth won’t be sustained forever, PDCO might be a better shorter term investment allowing you to take advantage of unusually high short term dividend growth rates. On a valuation basis PDCO has a PE of 19.7 which is below its peers and about in line with the market in general.
When it comes to feeding and caring for our pets we have many choices of great dividend paying companies that produce products from The Clorox Company (CLX), Colgate-Palmolive Co. (CL), The Procter & Gamble Company (PG) to perhaps lesser known Spectrum Brands Holdings, Inc. (SPB).
Let’s start with Spectrum Brands Holdings, Inc. (SPB) since it doesn’t get as much attention as the other dividend stalwarts mentioned. SPB, a diversified company produces aquatic equipment and supplies, dog and cat treats, small animal foods, training aids, health and grooming products and bedding. SPB currently yields 1.50% with a low payout ratio of 28.3%. Shares of SPB recently had a very high run up and is at or near its 52 week high which has given it a high current PE of 50.27. However, forward valuations are back down on Earth at only 16.6. Given its recent run up, shares of SPB are overvalued and you might want to wait to pull the trigger on this one and see how its dividend policy becomes more established as SPB only started paying distributions in 2012 with regular payments being made in 2013.
And now onto the dividend stalwarts of the pet industry. First up is The Clorox Company (CLX). A company that needs no introduction CLX, the maker of Fresh Step and Scoop Away currently offers a generous 3.20% yield with a moderately high payout ratio of 68.4%. Of course, investors in CLX know all too well the tremendous dividend history of this company has, as payouts have been raised 36 years straight. Of course, the ten year annualized dividend growth rate of CLX has been impressive as well at 10.67%. The valuation of CLX is slightly high at 21.0 making it a little rich by general market standards on a current and forward basis as well. Maybe wait for a little pullback on this one.
Next, from the makers of Hill’s Science Diet dog and cat food we have another amazing dividend payer Colgate-Palmolive Co. (CL). CL currently yields 2.10% with a moderate payout ratio of 48.3% ensuring a safe dividend. CL has an amazing dividend history raising its payment every year for over 50 years! CL is also in the exclusive century club of dividend payers having paid a dividend every year since 1895. I think we can agree that CL is committed to its dividend policy. CL also has a very impressive ten year dividend growth rate at 11.45%. Those figures will help compound your money. On a current PE basis CL is expensive by any measure at 29.3. I know many dividend investors are waiting for a pullback to buy this one.
Finally, on our dividend pet adventure we have The Procter & Gamble Company (PG). The makers of Iams, Eukanuba and Natura brand pet foods, PG currently yields a generous 3.20% with a moderate payout ratio of 61.3%. PG, another dividend favorite, has been raising its payment every year for over 57 years with a ten year annualized dividend growth rate of 10.6%. Impressive numbers to say the least. On a PE basis PG might be a little rich at 21.1, however as you know, sometimes you have to pay up for quality. No worries as PG’s forward PE is only 17.4. This might help you justify buying at current levels. On a side note, Mars, Incorporated has recently agreed to buy the Iams, Eukanuba and Natura pet food brands from PG for $2.9 billion. The deal is set to go through later this year.
Clearly, investing in the pet industry offers a wide variety of dividend opportunities from very high yield (PETS), to amazing dividend growth (PETM, PDCO) to dividend stalwarts that need no introduction (CLX, CL, PG). The question then becomes which type of dividend stock suits your investing profile and style?
Disclosure: Long CLX, CL, PG