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.
PX’s dividend growth potential ranks below average with a dividend Growth Score of 24. Macro challenges are weighing on sales and earnings growth, and the company’s balance sheet has less flexibility than many other companies.
With that said, PX has increased its dividend for 22 consecutive years – not long enough to be on the dividend aristocrats list, but a very solid track record nonetheless. The company raised its dividend by 10% earlier this year and shouldn’t have a problem with continued increases given its steady free cash flow generation.
As seen below, dividend growth has decelerated over the last 10 years. Going forward, PX plans to grow the dividend at least in line with earnings growth every year.
Source: Simply Safe Dividends
Going forward, we believe PX will continue increasing its dividend at a high-single digit rate, although 2016 could come in a bit lower as the company digests an acquisition and continues battling macro headwinds.
Valuation
Praxair, Inc. (NYSE:PX) trades at about 17x forward earnings estimates and has a dividend yield of 2.8% – not enough to live on in retirement, but a decent starting yield given PX’s dividend growth. With long-term earnings growth likely in the 7-11% range (management believes earnings growth will return to a double-digit rate when cyclical macro headwinds turn) the stock appears to offer total return potential of 10-14% per year – not bad at all for an extremely high quality business like PX’s.
However, with no end in sight to PX’s macro headwinds and potential for things to get worse before they get better, it’s hard to make the case to go “all in” today. With that said, we do expect these challenges to eventually reverse and can see how a case could be made to start averaging into the stock today. Saving some dry powder in the event that macro conditions further deteriorate in 2016 isn’t a bad idea.
Conclusion
PX is an excellent business trading at a reasonable price. However, the macro headwinds impacting its business seem likely to persist for at least the next 6-12 months. While the likelihood is probably low, these challenges could also morph into an even greater problem if certain customers in commodity-sensitive sectors such as metals (17% of sales) and energy (13%) are no longer able to honor their take-or-pay contracts. Brazil (~10% of sales) and China (6%) could also get worse before they get better.
PX will get through whatever macro challenges are thrown at it, just like it has every other time over the last 100+ years. The company’s business model remains very strong during recessionary times, and the dividend appears to be reasonably safe (although we wouldn’t mind seeing the company put a little more cash on the balance sheet).
While no one can predict the future, PX seems like a reasonable bet for dividend growth investors willing to hold on for at least five years. However, the investment’s timeliness seems low given the persistence of today’s macro headwinds. We would be more interested if the stock weakened even further during 2016.
We don’t own the stock in our Top 20 Dividend Stocks portfolio but will keep it on our watch list.
Disclosure: None
