Motley Fool recommends Zoetis and Badger Meter amid sharp dividend stock declines

The Motley Fool has identified Zoetis (ZTS) and Badger Meter (BMI) as investment opportunities, citing valuation discounts of 34% to 52% for the two dividend payers. The firm notes that while the S&P 500 remains near all-time highs, these steady dividend stocks have sold off as market focus shifted toward AI, semiconductor, and space sectors.

For Zoetis, the analyst acknowledges previous missteps regarding the company's growth trajectory, specifically the stalled progress in next-generation osteoarthritis medicines for pets. This setback, combined with declining U.S. veterinary visits, has pressured the stock. Zoetis previously traded at 70 times free cash flow during its 2023 peak but now trades at 13 times free cash flow. Recent financial results showed organic sales dipping 1% and earnings per share rising 4% last quarter. Despite these headwinds, the global animal healthcare market is expected to grow by 5% annually through 2035. Zoetis has historically outpaced industry growth every year since 2013, excluding 2020 and potentially 2026. Management projects 12 blockbusters with $100 million in annual sales in its pipeline by 2030, supported by 75 years of R&D experience. The stock currently yields 3%. Additionally, management retired 8% of outstanding shares in the past year, following a trend of reducing share count by 1.8% annually over the last decade.

Badger Meter presents a different operational picture, with sales growth turning negative in its two most recent quarters after double-digit growth in 15 of the previous 17. The stock was roughly halved over 18 months, leaving it trading near a decade-long low of 29 times earnings. The company typically generates strong free cash flow, resulting in a valuation of 24 times free cash flow, compared to an average of nearly 50 times earnings over the last decade. Management attributes the current sales cyclicality to the conclusion of four major projects and the launch of nine new ones. Badger Meter is shifting operations toward SaaS sales to help water utilities modernize infrastructure. With 60% of U.S. water meter connections still using outdated technologies, the company sees significant room for growth in replacing aging equipment. The firm has grown its dividend payments by 15% annually over the past decade, currently offering a 1.3% yield.