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More people are visiting veterinarians during the COVID-19 pandemic, with spending per visit increasing at a double-digit rate in the U.S.andresr/iStockPhoto / Getty Images

Animal welfare organizations across Canada have seen a surge in demand for pet adoptions as Canadians spend more time at home during the pandemic and opt for the comfort of animal companionship and the distraction that it provides from the hard realities of COVID-19.

For investors, health care for pets and livestock offers another way to look at this trend. It is growing strongly, has solid fundamentals and committed customers.

Kristin Peck, chief executive officer of Parsippany, N.J.-based Zoetis Inc. (ZTS-N), the largest pure animal pharmaceutical company, said as much in a recent conference call during which she called animal health care a “steady and reliable sector,” even in times of economic hardship.

“No matter where you sit, everyone has a new dog or cat in your neighbourhood,” she says.

Ms. Peck says people are spending more time with their pets this year and have become more aware of their pets’ health, picking up on previously unnoticed ailments and anxieties. Such things as itches, skin rashes and general pain and discomfort. In turn, more people are visiting veterinarians, with spending for each visit increasing at a double-digit rate in the United States.

“We see that as a global trend,” she says.

Dr. Ian Sandler, CEO of Grey Wolf Animal Health Inc., a Toronto-based company that provides pharmaceutical products to veterinary clinics, says he agrees with Ms. Peck’s hypothesis.

“We’ve seen many shelters empty this year, primarily of dogs, but cats as well. It’s been really amazing,” he says.

Dr. Sandler, who speaks on behalf of the Canadian Veterinary Medical Association, says pet adoptions boomed as the spring lockdown began. With March break and summer holiday plans on hold, people toying with pet adoption took the plunge.

“For so many people who have been alone in this difficult time, pets have really been a godsend,” he says.

Zoetis makes medicines, vaccines and diagnostic products for livestock and farm animals, as well as companion animals. It was spun off by Pfizer Inc. in 2013 and has an annual revenue of about US$6.5-billion.

Ms. Peck pointed out in the conference call that revenue related to companion animals rose 20 per cent, operationally, in its third quarter, ended Sept. 30. Livestock products, which were hurt more by the pandemic, rose 9 per cent. Overall quarterly revenue rose 13 per cent year over year to US$1.8-billion and while net income was 11 per cent higher at US$479-million.

Investors have bet that these trends will stick. They have pushed Zoetis’s stock up 20 per cent year to date to US$161.36 as of Dec. 2. The dividend yield is a modest 0.5 per cent and the price-to-earnings ratio a lofty 46.5.

So, does that make it a good investment?

Paul MacDonald, chief investment officer at Harvest Portfolios Group in Oakville, Ont., says Zoetis has hit high notes in terms of growth and business plan execution consistently.

He says Americans spent US$95.8-billion on their pets in 2019, 5.7 per cent more than a year earlier, according to the American Pet Products Association. That includes the purchase of animals themselves, as well as food, grooming and veterinary spending.

“Pets are important to people,” says Mr. MacDonald, who owns a Labrador retriever.

He says pet spending will spike this year. While there are no hard figures, there is plenty of evidence. He says net American pet adoptions were rising on average by 30,000 a year for a few years prior to 2020. If you extrapolate this year’s data thus far, it will be almost nine times higher at 261,000.

Mr. MacDonald cites research by New York-based data and market measurement firm Nielsen Co. LLC, which shows sales of leashes, collars and dog houses have been soaring. Quarter over quarter, leash sales rose 16 per cent between April and June, followed by another 13 per cent in the summer and another 15 per cent in the fall.

Zoetis is the third-largest holding in Harvest Healthcare Leaders Income ETF (HHL-T), an exchange-traded fund that holds a portfolio of 20 of the largest global health care companies.

“We’ve liked Zoetis for a while,” Mr. MacDonald says. “It’s not exactly what you might think of in a health care fund, but it adds diversification and is best in class.”

Zoetis has a history of strong relationships with its customers and offers many leading brands among vaccines, parasite and dermatology products, he says.

There are a couple of other large players in the animal health care space that investors could consider.

Elanco Animal Health Inc. (ELAN-N), which was spun off from Eli Lilly & Co. in 2019, is the second-largest company next to Zoetis. It closed the US$6.89-billion purchase of Bayer Animal Health in August. Both firms have combined sales of about US$5-billion annually.

Merck & Co. Inc. (MRK-N) operates its animal health business as a division within the larger company. It generates US$4.4-billion a year in sales, or about 10 per cent of Merck’s revenue.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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