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Share-Based Payments (Tables)
 12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Components of Share-based Compensation Expense
The components of share-based compensation expense follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

Stock options / stock appreciation rights
 
$
10

 
$
10

 
$
10

RSUs / DSUs(a)
 
34

 
26

 
22

PSUs
 
9

 
8

 
5

Share-based compensation expense—total(b)
 
$
53

 
$
44

 
$
37

Tax benefit for share-based compensation expense
 
(7
)
 
(13
)
 
(10
)
Share-based compensation expense, net of tax
 
$
46

 
$
31

 
$
27


(a)  
For the year ended December 31, 2018, includes share-based compensation expense of $7 million related to the acquisition of Abaxis, for the post-merger service period. For additional details see Note 5. Acquisitions and Divestitures.  
(b) 
For each of the years ended December 31, 2018, 2017 and 2016, we capitalized approximately $1 million of share-based compensation expense to inventory.
Share-based Payment Awards, Stock Options, Valuation Assumptions
The fair-value-based method for valuing each Zoetis stock option grant on the grant date uses the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:
 
 
Year Ended December 31,
 
 
2018

 
2017

 
2016

Expected dividend yield(a)
 
0.69
%
 
0.76
%
 
0.89
%
Risk-free interest rate(b)
 
2.74
%
 
2.29
%
 
1.57
%
Expected stock price volatility(c)
 
23.61
%
 
23.26
%
 
26.70
%
Expected term(d) (years)
 
6.5

 
6.5

 
6.5

(a) 
Determined using a constant dividend yield during the expected term of the Zoetis stock option.
(b)
Determined using the interpolated yield on U.S. Treasury zero-coupon issues.
(c)
Determined using an equal weighting between historical volatility of the Zoetis stock price and implied volatility. The selection of the blended historical and implied volatility approach was based on our assessment that this calculation of expected volatility is more representative of future stock price trends.
(d)
Determined using expected exercise and post-vesting termination patterns.
Stock Option Activity
The following table provides an analysis of stock option activity for the year ended December 31, 2018:
 
 
 
 
 
 
Weighted-Average
 
 
 
 
 
 
 
 
Remaining
 
Aggregate

 
 
 
 
Weighted-Average

 
Contractual Term
 
Intrinsic Value(a)

 
 
Shares

 
Exercise Price

 
(Years)
 
(MILLIONS)

Outstanding, December 31, 2017
 
4,905,884

 
$
37.10

 
 
 
 
Granted
 
538,820

 
73.32

 
 
 
 
Exercised
 
(1,185,867
)
 
30.38

 
 
 
 
Forfeited
 
(101,708
)
 
49.46

 
 
 
 
Outstanding, December 31, 2018
 
4,157,129

 
$
43.41

 
6.5
 
$
175

Exercisable, December 31, 2018
 
2,198,213

 
$
32.90

 
5.1
 
$
116

(a) 
Market price of underlying Zoetis common stock less exercise price.
As of December 31, 2018, there was approximately $8 million of unrecognized compensation costs related to nonvested stock options, which will be recognized over an expected remaining weighted-average period of 1.0 years.
The following table summarizes data related to stock option activity:
 
 
Year Ended/As of December 31,
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS)
 
2018

 
2017

 
2016

Weighted-average grant date fair value per stock option
 
$
20.30

 
$
14.31

 
$
11.34

Aggregate intrinsic value on exercise
 
66

 
32

 
23

Cash received upon exercise
 
36

 
35

 
36

Tax benefits realized related to exercise
 
23

 
16

 
15
Restricted Stock Units (RSUs)
The following table provides an analysis of RSU activity for the year ended December 31, 2018:
 
 
 
 
Weighted-Average

 
 
RSUs

 
Grant Date Fair Value

Nonvested, December 31, 2017
 
1,661,500

 
$
47.45

Granted
 
438,283

 
73.55

    Replacement awards
 
502,766

 
85.26

Vested
 
(556,066
)
 
48.97

Reinvested dividend equivalents
 
9,640

 
52.74

Forfeited
 
(80,464
)
 
51.77

Nonvested, December 31, 2018
 
1,975,659

 
$
62.28
Performance-based Units Activity (PSUs)
The following table provides an analysis of PSU activity for the year ended December 31, 2018:
 
 
 
 
Weighted-Average

 
 
PSUs

 
Grant Date Fair Value

Nonvested, December 31, 2017
 
408,742

 
$
61.53

Granted
 
109,574

 
100.34

Vested
 
(110,158
)
 
63.01

Reinvested dividend equivalents
 
2,579

 
68.41

Forfeited
 
(19,896
)
 
63.58

Nonvested, December 31, 2018
 
390,841

 
$
71.93

Shares issued, December 31, 2018
 
182,983

 
$
63.14