Air Products & Chemicals, Inc. (APD): A Dividend Aristocrat Distributing Higher Dividends for 38 Straight Years

Reviewing APD’s balance sheet is very important given the company’s cyclicality. APD says it is committed to maintaining a balance sheet that deserves an A credit rating, but it has more debt than we like to see. The company will use some of the proceeds from the Materials Technologies spin-off to reduce debt.

Source: Simply Safe Dividends

Overall, APD’s Dividend Safety Score is only about average because of the company’s cyclicality, high debt, and relatively high payout ratios (by our standards for a cyclical business).

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

APD has increased its dividend for 38 straight years and is a dividend aristocrat. The company has a Dividend Growth Score of 56, which suggests its dividend growth potential is about average.

It’s uncertain how APD’s current dividend will be split between its Materials Technologies spin-off and its industrial gases business. However, management has stated that the total amount of dividends will be the same and that the company will continue targeting a 2.5% to 3% yield.

As seen below, APD’s dividend has grown at a high-single digit rate over the last decade, although growth has slowed into the mid-single digits more recently. Until we have more clarity on the spin-off’s impact on the dividend, we expect no more than a mid-single digit growth rate going forward.

Source: Simply Safe Dividends

Valuation

Air Products & Chemicals, Inc. (NYSE:APD) trades at 18x forward earnings and has a dividend yield of 2.5%, which is slightly lower than its five year average of 2.7%.

We believe this business can compound its earnings by 5-7% per year over the long term, resulting in a potential total return of 8-10% per year.

However, at 18x earnings and a dividend yield somewhat below its five-year average, we believe the stock is at least fairly valued today. We would be more interested in owning it below $120 per share.

Conclusion

APD is a durable business with numerous competitive advantages. We would be interested in owning this blue chip dividend stock at a better price, which would potentially be caused by a continued slowdown in global growth prospects.

Disclosure: None