Investing in Air Products & Chemicals (NYSE: APD): A Solid Addition to Your Portfolio
When it comes to selecting dividend stocks for your investment portfolio, it’s essential to look beyond just the status of being a Dividend Aristocrat or Dividend King. While consistency in dividend payouts is crucial, it’s equally important to consider the company’s growth potential and financial health.
Air Products & Chemicals (NYSE: APD) is a prime example of a company that ticks all the boxes for investors looking for long-term growth and income. With more than 40 consecutive years of dividend increases, APD is not just a Dividend Aristocrat but also the largest hydrogen supplier globally, operating over 750 production facilities in approximately 50 countries.
Despite facing challenges in the global chemical industry due to weak global growth, APD has been able to maintain its financial strength and growth trajectory. The company’s recent third-quarter results for its 2024 fiscal year showcased a 5% increase in EBITDA to $1.3 billion, driven by higher margins and a favorable business mix. Adjusted earnings per share also saw a 7% year-over-year increase to $3.29.
Regionally, APD’s performance has been solid, with EBITDA in the Americas rising by 6% and a significant increase in margins. Europe also saw a 12% increase in EBITDA, mainly attributed to new assets and cost efficiencies. While Asia and the Middle East/India faced challenges with weak volumes and pricing headwinds, the overall outlook for the company remains positive.
In terms of strategic partnerships, APD recently announced an agreement with TotalEnergies to supply 70 thousand tons of green hydrogen per year starting in 2030. This deal not only supports the company’s long-term growth strategy but also highlights the growing demand for green hydrogen, especially in markets like Europe.
Furthermore, APD’s decision to sell its LNG Process Technology and Equipment business to Honeywell for $1.8 billion demonstrates its focus on core operations and strategic collaboration with companies like Mercedes-Benz to develop fuel cell trucks and hydrogen fueling stations.
One of the key strengths of APD is its dual focus on expanding its core industrial gases business while leading in the delivery of low-carbon hydrogen. This two-pillar strategy sets the company apart from smaller startups in the chemical space by offering financial stability and growth potential without elevated risks.
Financially, APD boasts a return on capital employed of 11% and an A-rated balance sheet with a net leverage ratio of less than 3x EBITDA. The company’s earnings per share are expected to range from $12.20 to $12.50, indicating a 6% to 9% growth rate and extending its impressive growth streak of an 11% CAGR since 2014.
From a dividend perspective, APD has increased its dividend for 41 consecutive years, with a 9% annual growth rate since 2014. Currently yielding 2.5% with a 58% payout ratio, the company offers a stable income stream for investors looking for consistent returns.
In terms of valuation, APD shares are trading at a blended P/E ratio of 22.7x, slightly below its 10-year average of 22.9x. Analysts expect a 7% EPS growth in 2024, followed by 9% growth in 2025 and 2026, with a fair stock price estimate of $336, 20% above its current price.
While the operating environment remains challenging, APD’s resilient performance and growth potential make it an attractive investment option for dividend investors. The company’s focus on core operations, strategic partnerships, and financial stability position it for sustained capital gains and long-term growth.
In conclusion, Air Products & Chemicals (NYSE: APD) stands out as a compelling investment opportunity for investors seeking a combination of income, growth, and stability in their portfolio. With a track record of consistent dividend growth, strong financials, strategic partnerships, and a focus on emerging technologies, APD offers a solid foundation for long-term success in the chemical industry.
