# Zoetis Inc. (NYSE:ZTS)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Zoetis Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 8.26%
0 DPS01 0.80
1 DPS1 1.14 = 0.80 × (1 + 42.35%) 1.05
2 DPS2 1.52 = 1.14 × (1 + 33.70%) 1.30
3 DPS3 1.90 = 1.52 × (1 + 25.05%) 1.50
4 DPS4 2.22 = 1.90 × (1 + 16.41%) 1.61
5 DPS5 2.39 = 2.22 × (1 + 7.76%) 1.61
5 Terminal value (TV5) 514.37 = 2.39 × (1 + 7.76%) ÷ (8.26%7.76%) 345.85
Intrinsic value of Zoetis Inc.’s common stock (per share) \$352.92
Current share price \$172.29

Based on: 10-K (filing date: 2021-02-16).

1 DPS0 = Sum of the last year dividends per share of Zoetis Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.25% Expected rate of return on market portfolio2 E(RM) 11.73% Systematic risk of Zoetis Inc.’s common stock βZTS 0.63 Required rate of return on Zoetis Inc.’s common stock3 rZTS 8.26%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rZTS = RF + βZTS [E(RM) – RF]
= 2.25% + 0.63 [11.73%2.25%]
= 8.26%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Zoetis Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends declared 404  330  261  216  193
Net income attributable to Zoetis 1,638  1,500  1,428  864  821
Revenue 6,675  6,260  5,825  5,307  4,888
Total assets 13,609  11,545  10,777  8,586  7,649
Total Zoetis Inc. equity 3,769  2,708  2,185  1,770  1,487
Financial Ratios
Retention rate1 0.75 0.78 0.82 0.75 0.76
Profit margin2 24.54% 23.96% 24.52% 16.28% 16.80%
Asset turnover3 0.49 0.54 0.54 0.62 0.64
Financial leverage4 3.61 4.26 4.93 4.85 5.14
Averages
Retention rate 0.77
Profit margin 21.22%
Asset turnover 0.57
Financial leverage 4.56

Dividend growth rate (g)5 42.35%

Based on: 10-K (filing date: 2021-02-16), 10-K (filing date: 2020-02-13), 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-16).

2020 Calculations

1 Retention rate = (Net income attributable to Zoetis – Dividends declared) ÷ Net income attributable to Zoetis
= (1,638404) ÷ 1,638
= 0.75

2 Profit margin = 100 × Net income attributable to Zoetis ÷ Revenue
= 100 × 1,638 ÷ 6,675
= 24.54%

3 Asset turnover = Revenue ÷ Total assets
= 6,675 ÷ 13,609
= 0.49

4 Financial leverage = Total assets ÷ Total Zoetis Inc. equity
= 13,609 ÷ 3,769
= 3.61

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.77 × 21.22% × 0.57 × 4.56
= 42.35%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$172.29 × 8.26%\$0.80) ÷ (\$172.29 + \$0.80)
= 7.76%

where:
P0 = current price of share of Zoetis Inc.’s common stock
D0 = the last year dividends per share of Zoetis Inc.’s common stock
r = required rate of return on Zoetis Inc.’s common stock

#### Dividend growth rate (g) forecast

Zoetis Inc., H-model

Year Value gt
1 g1 42.35%
2 g2 33.70%
3 g3 25.05%
4 g4 16.41%
5 and thereafter g5 7.76%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 42.35% + (7.76%42.35%) × (2 – 1) ÷ (5 – 1)
= 33.70%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 42.35% + (7.76%42.35%) × (3 – 1) ÷ (5 – 1)
= 25.05%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 42.35% + (7.76%42.35%) × (4 – 1) ÷ (5 – 1)
= 16.41%