Get A 4.5% Dividend From This Little-Known Stock While It's Still Cheap

Karen Canella
January 23, 2014

In the investing world, one shareholder's disappointment is often another's opportunity.

The stock I have in mind sold off nearly 6% after the company reported that its 1% year-over-year increase in third-quarter revenue fell just shy of analysts' estimates. 

Granted, growth has slowed in recent times for this direct-to-consumer seller of drugs for many of man's four-legged friends. Still, I'd say current investors in PetMed Express (Nasdaq: PETS) are a pretty finicky bunch. 

Even if you missed out on its 48% gain last year, you can still reap the benefits of its 4.5% dividend and share buyback program. If you pick it up before sellers come to their senses, you could even own it at a discount. 

At around $14 a share and trading at a price-to-earnings (P/E) ratio of just under 15, PETS is a bargain compared with its closest competitor. MWI Veterinary Supply (Nasdaq: MWIV) has a P/E of 36 and trades at nearly $177 a share -- without dishing out even a penny in dividends.

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With a market cap of $276 million, PetMeds has high profit margins, zero debt and $42 million in free cash flow -- a recipe for the continuation of hefty dividends.

Of course, PetMeds also faces stiff competition from $7.7 billion pet care juggernaut PetSmart (Nasdaq: PETM), but PetMeds' business model and product lines differ enough that each has a fairly unique set of customers.

In contrast to MWI, which sells products directly to veterinarians who then sell to consumers, PetMeds allows owners to cut out the middleman and pay less for their supplies. This model effectively ended the monopoly held by veterinarians on pet medications. PetMeds also sells health products, toys and treats, with the convenience of home delivery. 

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The most consistent driver of growth for PetMeds is Americans' love for their pets and their willingness to do anything to keep them healthy and happy. That's as strong a catalyst as you can ask for -- and one that has buoyed the number of customers more than 800% in the past four years. 

With 7 million loyal and largely repeat customers, there's plenty of room to expand: According to a survey by the American Pet Products Manufacturers Association, 101 million U.S. households have cats and/or dogs. The same survey reported that pet owners spent $53.3 billion on general pet supplies last year, of which $12.6 billion went toward over-the-counter medication. 

In addition, the growing number of retired baby boomers has increased pet ownership among senior citizens to 46%, a trend expected to last another 15 years. (My colleague Joseph Hogue examined this trend (and PETS) in his "Graying of America" series last summer.)

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Another incentive for pet owners to spend money on health products is a proposal by the U.S. government to give a tax credit of up to $3,500 for qualified costs. Just like humans, many animals suffer from diseases that require ongoing treatment. 

For example, the Association of Pet Obesity Prevention says 80 million pets in the U.S. are overweight. That's a dismaying fact that also happens to look like an opportunity for PetMeds.

Risks to Consider: Fierce competition has weighed on PetMeds' revenue growth and market share. Be sure to diversify properly when investing. 

Action to Take --> PetMeds has worked feverishly to build its brand and customer base. I wouldn't expect a 48% gain again in 2014, but the hefty dividend isn't going away. The long-term trends in pet ownership suggest this is a great stock for the long term.

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