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I always keep an eye on Fundsmith portfolio manager Terry Smith’s trades. Over the long term, he’s beaten the market by a wide margin. In recent days, it’s come to light that Smith has just bought two new dividend growth stocks for his flagship equity fund. Here’s a look at the brace he’s snapped up.
An animal health stock
First up, we have Zoetis (NYSE: ZTS). It’s the world’s largest producer of medicine and vaccinations for pets and livestock.
A US-listed stock (it’s listed on the New York Stock Exchange), it’s a member of the S&P 500 index. It currently has a market-cap of about $70bn, which is large on a global scale but relatively small by US standards.
I like this trade from Smith. Animal health is a large and growing market. And this company’s a market leader with high-quality attributes.
Revenues are on an upward trajectory (five-year growth of nearly 50%). Meanwhile, the company’s very profitable (five-year average return on capital of 23%).
The dividend payout’s also growing fast. Over the last three years, it’s climbed 73% (the yield’s only about 1.2% however).
As for the valuation, it seems reasonable. Currently, the forward-looking price-to-earnings (P/E) ratio is 26, which isn’t high given the company’s rate of growth and level of profitability.
There are plenty of risks here, of course. Product safety issues, manufacturing and supply chain (tariff) issues, and regulatory risks are some worth highlighting
Overall though, I like the look of this stock. I think it’s worth considering today.
An under-the-radar tech stock
The other stock Smith added to the portfolio was Intuit (NASDAQ: INTU). It’s a leading provider of accounting and tax software (it owns QuickBooks and TurboTax).
A Nasdaq stock, it’s also in the S&P 500. It currently has a market-cap of about $175bn.
Smith has owned this stock before. A few years ago, he sold it on the back of valuation concerns.
The recent re-entry suggests he sees more value on offer today. Currenty, the forward-looking price-to-earnings (P/E) ratio is about 28, which is lofty, but not crazy for a high-quality software company. Yet it makes the stock riskier than some.
Like Zoetis, this company has strong financials. Over the last five years, revenue has climbed about 140% while profitability levels have been high. As for the dividend payout, it’s jumped 93% over this period. Like a lot of US stocks though, the yield isn’t high today (around 0.6% at present).
Personally, I like the look of this trade. This is a company with a high level of recurring revenues and plenty of long-term growth potential.
Products from competitors such as Sage and Xero are a risk. However, this company has a good track record when it comes to maintaining market share.
Given that track record, I think this stock’s worth considering as a long-term growth investment.
