What is the expected impact on Zoetis' earnings per share (EPS) and free cash flow in the coming years due to the changed interest expense schedule?
Impact on EPS and free‑cash‑flow (FCF)
Zo ZTS is replacing $750 million of 4.50 % notes that mature in 2025 (and a portion of its 5.4 % senior debt) with $1.85 billion of new senior notes: $850 million at 4.15 % (2028) and $1 billion at 5.00 % (2035). The net‑interest‑rate reduction is modest but material for a company of Zoetis’ size:
| Debt repaid | Rate | New note rate | Net interest‑rate change* |
|---|---|---|---|
| $750 M 4.50 % 2025 | – | 4.15 % (2028) | –0.35 % |
| $250 M 5.40 % (estimated) | – | 5.00 % (2035) | –0.40 % |
*Average reduction ≈ 0.37 % on $1 billion of repaid debt = about $3.7 million lower annual interest expense.
Assuming Zoetis’ pre‑interest earnings stay roughly flat (the company is generating ~ $4 billion of revenue with ~ $800 million EBITDA), the $3–4 million reduction in interest expense translates to a ~0.5 %‑0.7 % increase in net income. On a 2025‑2027 horizon, this lifts diluted EPS by roughly $0.03‑$0.05 per share (≈ 2–3 % upward revision). Because interest expense is cash‑based, the same reduction flows through to free cash flow, boosting annual FCF by roughly $3‑$4 million (≈ 1 %‑1.5 % of YoY FCF, which is ~ $1.2 billion). The impact compounds over the next 2‑3 years as the lower‑cost debt remains on the balance sheet, providing a modest but steady tail‑wind to profitability.
Trading implications
- Fundamental upside: The modest EPS boost, combined with Zoetis’ robust growth (10‑12 % YoY revenue growth, strong cash‑conversion), makes the FY 2025‑27 earnings outlook modestly bullish. Analysts may upgrade EPS forecasts by ~2‑3 % and raise the target price accordingly.
- Credit & valuation: The issuance at modestly higher rates for the 2035 tranche (5 % vs 5.4 % previously) suggests management is comfortable with current credit spreads. The new senior‑note issuance adds liquidity and lengthens the maturity profile, reducing refinancing risk.
- Technical/price action: The stock has been trading in a tight $70‑$78 range. The earnings‑boosting news may act as a catalyst for a short‑term bounce; look for a breakout above the $76.50 resistance on volume, with a target of $80‑$82 within the next 4‑6 weeks.
Actionable take‑away: Keep or modestly increase exposure to Zoetis (e.g., add 1‑2 % to a core health‑care allocation) while monitoring the 2028 and 2035 note‑pricing spread. A positive earnings revision and higher FCF improve the risk‑adjusted return, especially if the broader market remains supportive of defensive, cash‑generating stocks.