Air Products & Chemicals: An Undervalued Dividend Champion

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Suppose you are in pursuit of a distinguished dividend growth investment opportunity. In that case, our focus turns to an undervalued dividend stock of particular interest – Air Products & Chemicals, identified by the APD ticker. As of the time of writing, the stock is trading at $241.61 per share, prompting a closer examination of its valuation and suitability for investment. This analysis will assess whether Air Products & Chemicals is a sound destination for our hard-earned capital.

Upon scrutiny using Fastgraphs, the company’s financial outlook appears promising, with anticipated annual returns exceeding 15% for the next three years at the current share price.

(Click on image to enlarge)

APD Fastgraphs Chart

Source: Fastgraphs


Here, we have a technical chart of APD. We can see that it’s near long-term support. The chart shows that it is down many red bars on the monthly time frame. Also, the RSI tells us that it is currently a little oversold. The next support area is the $180 area.

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APD Technical Chart

Source: TradingView


Overview of APD

Air Products and Chemicals, Inc. supplies atmospheric gases, process and specialty gases, equipment, and associated services across the Americas, Asia, Europe, the Middle East, India, and globally. The firm manufactures atmospheric gases like oxygen, nitrogen, and argon and processes hydrogen, helium, carbon dioxide, carbon monoxide, and syngas. Specializing in serving diverse industries such as refining, chemical, manufacturing, electronics, energy production, medical, food, and metals, the company also creates custom specialty gases. It is the number one hydrogen supplier globally.

Additionally, it designs and produces equipment for applications such as air separation, hydrocarbon recovery and purification, natural gas liquefaction, and the transport and storage of liquid helium and liquid hydrogen. Established in 1940, the company is headquartered in Allentown, Pennsylvania.

At present day, the stock is trading at $241.61 per share, aligning closely with the lower end of its 52-week price range, which spans from $212.24 to $307.71 per share. This positioning suggests that APD may present an attractive opportunity for investors seeking to acquire shares at a favorable price point.


APD Dividend History, Growth, and Yield

We will examine APD’s dividend history, growth, and yield and determine whether it’s still a good buy at current prices.

APD is considered a Dividend Champion, a company that has increased its dividend for over 25 years.

In this case, APD stock has increased its dividend for 42 consecutive years. APD’s most recent dividend increase was 1.1%, announced in January 2024.


Dividend Growth

Additionally, according to Portfolio Insight, APD’s five-year dividend growth rate is about 9.44%, which is excellent. The 10-year dividend growth rate is higher at ~9.7%.

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Portfolio Insight - Dividend Growth APD

Source: Portfolio Insight


Something noteworthy is that APD stock continued to pay its dividends during the most challenging period in the last 100 years. Many businesses and industries cut or suspended their dividend payments during the COVID-19 pandemic. However, unlike many other stocks, APD continued to pay out its dividend and increased it. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.


Dividend Yield

APD offers an appealing dividend yield of approximately 2.9%, surpassing the dividend yield of the S&P 500 Index. This robust dividend yield serves as an attractive starting point for investors who prioritize dividend growth in their portfolios. However, there may be better choices for income-focused investors seeking a 4.5% or higher yield from their investments.

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Portfolio Insight - Dividend Yield History APD

Source: Portfolio Insight

The current dividend yield for APD surpasses its 5-year average dividend yield, which stands at approximately 2.15%. This metric provides valuable insight into the company’s valuation. The relationship between stock price and dividend yield is inherently inverse, meaning that when stock prices rise, dividend yields tend to decrease, and vice versa. Investors can gauge whether the stock is undervalued or overvalued by comparing the current dividend yield to the 5-year average. In this context, the higher current yield relative to the 5-year average suggests that APD may currently be trading at a relatively attractive valuation.


Dividend Safety

Ensuring the safety of the current dividend is paramount for dividend growth investors, as undervalued dividend stocks can sometimes become “value traps,” with stock prices continuing to decline. Two crucial metrics must be examined to assess the sustainability of annual dividend payments: Adjusted operating earnings (EPS) and Free Cash Flow (FCF) or Operating Cash Flow (OCF) per share. 

Analysts’ projections indicate that APD is expected to earn approximately $12.31 per share for fiscal year 2024, and historical accuracy in forecasting APD’s future EPS is noted at 75%. Furthermore, the company is anticipated to distribute $7.08 per share in dividends over the entire year. This results in a payout ratio of roughly 57.5% based on EPS, which is an excellent payout for this company with a good starting yield, and it does have room for continued dividend growth. 

payout ratio under 60% is preferred as a prudent approach. APD’s dividend yield ratio of approximately 2.9%, combined with expectations for future growth, supports this goal and allows the company to sustain dividend growth at a mid-single-digit rate without compromising dividend safety. Additionally, APD maintains a dividend payout ratio of 39.5% based on Operating Cash Flow (OCF), further affirming the dividend’s security in terms of EPS and OCF. 


APD Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well APD performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

APD’s revenue has been growing reasonably at a compound annual growth rate (CAGR) of about 2.16% for the past ten years, according to Portfolio Insight. Net income, however, had a CAGR of 9.8% over the same ten-year period. However, EPS has grown 7.7% annually for the past ten years and at a CAGR of 9.1% over the past five years.

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Portfolio Insight - Revenue APD

Source: Portfolio Insight

Considering the company’s track record of revenue, net income, and EPS growth over the years, our evaluation will primarily focus on its valuation and dividend yield. Analysts project that Bristol-Myers Squibb will sustain a flat annual growth rate in EPS over the next five years.

Notably, despite the challenges posed by the COVID-19 pandemic over the past three years, APD achieved an 8% increase in EPS, rising from $8.38 per share in FY2020 to $9.02 per share for FY2021. Furthermore, analysts anticipate that APD will attain an EPS of $12.31 per share for fiscal year 2024, reflecting approximately a 7% increase compared to FY2023. This consistent pattern of earnings growth is a positive indicator for investors, indicating the company’s resilience and ability to continue improving its financial performance. Also, the forecasted earnings for the subsequent years suggest a 9% increase in 2025 and 2026, further bolstering confidence in APD’s future earnings potential.

Furthermore, APD maintains a robust balance sheet with a favorable debt-to-equity ratio of 0.8 and an “A” S&P credit rating. This solid financial position enhances the company’s capacity to navigate significant economic challenges, as evidenced by its stability during the COVID-19 pandemic’s two-year impact. This aspect also contributes to the security of the company’s dividend payments.


APD Stock’s Competitive Advantage

Air Products and Chemicals, Inc. (APD) boasts a competitive edge derived from its global presence across the Americas, Asia, Europe, the Middle East, and India. This expansive reach positions the company to tap into diverse markets, offering a buffer against regional economic uncertainties. APD’s strength lies in its diversified product portfolio encompassing atmospheric, process, specialty gasses, and associated equipment. This broad range of offerings allows the company to cater to various industries, reducing reliance on any single market segment. Additionally, APD’s commitment to technological innovation and its established customer relationships, particularly in sectors like refining, manufacturing, and healthcare, contribute to its competitive positioning.

Nevertheless, Air Products and Chemicals, Inc. faces inherent risks in its industry. The company is sensitive to economic fluctuations, with its business closely tied to the performance of the industries it serves. Moreover, exposure to commodity price volatility, especially in natural gas and helium, presents a challenge that requires careful management. Regulatory uncertainties and compliance issues, typical in the chemical and industrial gas sector, add a layer of risk. Currency exchange rate fluctuations, stemming from APD’s global operations and intense competition within the industrial gas industry, further contribute to the complex risk landscape that the company must navigate for sustained success. One should refer to APD’s latest financial reports and official communications for the most accurate and up-to-date information.


Valuation for APD Corp.

One valuation metric that I would like to look for is the dividend yield compared to the past few years’ history. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that the company can provide. 

Let’s first look at the P/E ratio. APD has a P/E ratio of ~20.4X based on FY 2024 EPS of $12.31 per share. The P/E multiple is excellent compared to the past 5-year P/E average of 25.3X. If APD were to vert back to a P/E of 25.3X, we would obtain a price of $311.44 per share.

Now, let’s look at the dividend yield. As I mentioned, it is currently 2.9%. There is good upside potential, as APD’s 5-year dividend yield average is ~2.1%. For example, if APD were to return to its 5-year dividend yield average, the price target would be $337.14.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. I use a 10% discount rate because of the low current dividend yield. In addition, the projected dividend growth rate is conservative and in line with its past 5-year average. These assumptions give a fair price target of approximately $252.52 per share.

If we average the three fair price targets of $311.44, $337.14, and $252.52, we obtain a reasonable, fair price of $300.36 per share, giving APD a possible upside of 24.3% from the current price of $241.61.


Final Thoughts on Air Products & Chemicals (APD): An Undervalued Dividend Champion

APD is a high-quality Dividend Champions that aligns well with the needs of most investors. The company offers an attractive 2.9% yield, outperforming the broader market, and boasts a commendable track record of long-term dividend growth. Historical earnings growth has been impressive, although it’s important to note that past performance does not guarantee future results. Nevertheless, considering the current stock price, APD is an appealing investment opportunity, presenting a potentially attractive proposition for investors seeking income and growth in their portfolios.

Disclosure: I do not own shares of APD


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