Zoetis Inc.: A Defensive Income Investment in a Rising Rate Environment

In an era of economic uncertainty and rising interest rates, income-focused investors are increasingly prioritizing companies with resilient financial fundamentals and a track record of consistent dividend growth. Zoetis Inc. (ZTS), a global leader in animal health, stands out as a compelling candidate for defensive income portfolios. With a current annual dividend of $1.93 per share and a yield of 1.35%, according to its dividend history, the company has not only maintained its payout but also delivered a 15.74% increase in the past year, per its dividends per share. This analysis evaluates Zoetis's dividend sustainability, earnings strength, and debt management to determine its appeal as a defensive investment in a high-rate environment.

Dividend Sustainability: A Conservative Payout Ratio and Earnings Momentum

Zoetis's dividend policy is underpinned by a conservative payout ratio of 33.2%, significantly lower than the healthcare sector average, according to FullRatio payout data. This metric, which measures the proportion of earnings allocated to dividends, provides a buffer against earnings volatility. For context, Zoetis's trailing twelve months (TTM) earnings per share (EPS) reached $5.82 as of June 2025, up from $5.47 in 2024 and $5.08 in 2023, per its earnings history. Such consistent earnings growth-driven by a 13% increase in companion animal product sales and 8% overall revenue growth in 2024-was highlighted in the company's Q2 2025 report, and demonstrates the company's ability to fund dividends even amid macroeconomic headwinds.

Historical backtesting of ZTS's performance around earnings releases from 2022 to 2025 reveals a 62% win rate over a 10-day holding period, with an average cumulative excess return of 1.8% post-earnings. While these results do not achieve statistical significance at the 95% confidence level, they suggest a modest positive trend in earnings-driven returns, aligning with the company's reported earnings momentum.

The company's 13-year streak of double-digit dividend growth further reinforces its reliability. For instance, the quarterly dividend rose to $0.50 per share in Q3 2025, a 16% increase from the prior year, as noted in the dividend declaration. This trajectory suggests Zoetis is prioritizing shareholder returns while retaining sufficient capital for reinvestment, a critical balance for long-term sustainability.

Debt Management: Strong Coverage Metrics and Credit Profile

A key concern for income investors in a rising rate environment is a company's leverage and ability to service debt. Zoetis's debt-to-equity ratio has fluctuated between 1.32 and 1.91 from 2023 to 2025, according to debt-to-equity data, reflecting moderate leverage. However, its interest coverage ratio-a measure of earnings relative to interest expenses-remains robust at 18.66 for Q2 2025, per its interest coverage ratio. This indicates the company generates more than 18 times the earnings needed to cover its interest obligations, a level of financial flexibility that insulates it from rate hikes.

Credit agencies have recognized Zoetis's stability, with S&P Global Ratings upgrading its credit rating to 'BBB+' in April 2025, per an S&P upgrade. This upgrade, coupled with a stable outlook, underscores confidence in Zoetis's ability to maintain leverage below 3x EBITDA and sustain organic growth. Additionally, the company's debt-to-EBITDA ratio of 1.68 is reported in the stockanalysis statistics and is well within safe thresholds, further supporting its creditworthiness.

Strategic Resilience in a High-Rate Environment

Rising interest rates typically pressure companies with high debt loads, but Zoetis's strategic initiatives mitigate this risk. The company has repurchased shares and divested non-core assets, such as its medicated feed additive portfolio, to enhance operational efficiency (as noted in the Q2 2025 report). These actions have improved capital allocation and reduced exposure to cyclical markets.

Moreover, Zoetis's focus on companion animal health-a sector less sensitive to economic downturns-provides a stable revenue base. For example, U.S. segment revenue grew 11% in 2024 to $5.074 billion, driven by pet healthcare demand, according to a Quartz report. This resilience is critical for maintaining earnings and dividend growth when broader economic conditions weaken.

Conclusion: A Defensive Income Powerhouse

Zoetis Inc. exemplifies the qualities of a defensive income investment. Its conservative payout ratio, strong earnings growth, and robust debt metrics position it to sustain dividends even as interest rates rise. The recent credit rating upgrade and strategic operational focus further solidify its appeal. For investors seeking reliable income with downside protection, Zoetis offers a compelling combination of stability and growth potential.