Updated on April 29th, 2024 by Bob Ciura
Air Products & Chemicals (APD) may not be the most well-known company. It is primarily a business-to-business manufacturer and distributor of industrial gases.
However, Air Products & Chemicals is an elite dividend stock as a member of the Dividend Aristocrats, a group of reliable dividend stocks with 25+ years of consecutive dividend increases.
We believe the Dividend Aristocrats are among the best dividend growth stocks to buy for the long run. With that in mind, we created a list of all 68 Dividend Aristocrats, along with important metrics like price-to-earnings and dividend yields.
You can download a copy of our Dividend Aristocrats list by clicking on the link below:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
Air Products & Chemicals’ dividend history – 42 years of consecutive dividend increases – indicates that the company is a model of consistency.
The company has reinvented itself in recent years. A spinoff and a separate significant divestiture were implemented with the goal of streamlining the company’s business model and focusing on its core industrial gas operations.
Air Products & Chemicals appears poised to continue raising its dividend for many years to come.
Business Overview
Air Products & Chemicals is one of the largest producers and distributors of atmospheric and process gasses in the world. Its customers include other businesses in the industrial, technology, energy, and materials sectors. Air Products & Chemicals was founded in 1940 and has a current market capitalization of ~$52 billion.
It also has a significant international presence. Roughly 40% of the company’s annual sales are generated in the U.S. and Canada, with the remainder spread across Latin America, Europe, and Asia.
APD has generated double-digit annualized earnings growth over the past decade.
Source: Investor Presentation
Air Products & Chemicals reported financial results for the first quarter of fiscal 2024 on February 7. Revenue of $3.0 billion declined 6% year-over-year.
The decline was, in part, the result of a tough comparison compared to the previous year’s very strong quarter. Costs declined even more than revenue for the quarter, which allowed the company to grow profits.
Earnings-per-share of $2.82 during the first quarter rose 7% compared to the previous year’s period. Earnings-per-share grew at a solid pace while EBITDA was up by 8% during the period.
Following a record year in 2023, Air Products & Chemicals is guiding for another record profit in fiscal 2024, with earnings-per-share seen at $12.20 to $12.50.
Growth Prospects
The streamlining initiatives undertaken by Air Products & Chemicals in the past several years have led to significant profitability improvements for the industrial gas giant. The company’s EBITDA margin trend over the last several years can be seen below:
Air Products & Chemicals has expanded its adjusted EBITDA margin by ~1400 basis points since the second quarter of 2014 – a significant improvement, which has combined with growing adjusted EBITDA to drive higher earnings-per-share and dividends.
Source: Investor Presentation
It will also grow due to international expansion, as the company’s Gases Asia business has delivered the highest growth rate in the recent past, although its American business remains the largest segment.
Air Products & Chemicals has a number of growth projects either recently completed or scheduled to be completed in the coming months.
Some of these investments around the world include building a second liquid hydrogen plant in California, a new air separation unit (ASU) in Minnesota, an ASU plant in India, and helium investments in Algeria.
Air Products & Chemicals separately announced that it will build the first hydrogen fuel cell vehicle fueling station in Saudi Arabia, along with oil giant Saudi Aramco.
Air Products & Chemicals has also announced several more projects that will come online during the next couple of years, including a major $3.5 billion joint venture with Yankuang in China.
Last year, Air Products & Chemicals announced a new $7 billion Carbon-Free Hydrogen joint venture with ACWA Power and NEOM that will drive its green energy exposure.
These investments, coupled with margin growth initiatives, should lead to meaningful earnings growth for the company over the coming years. We expect 6% annualized EPS growth over the next five years.
Competitive Advantages & Recession Performance
Air Products & Chemicals has a number of competitive advantages. The first and primary advantage the company has is its size and market share.
Moreover, the industrial gas distribution business benefits from high switching costs. These costs may not necessarily be financial – instead, customers are unlikely to switch once their gas needs are being met by a particular supplier because it would be difficult to find a competitor that offers identical services in a particular geographic region.
To that end, Air Products & Chemicals’ size also benefits the company.
The company’s recent divestitures and asset sales have given it an infusion of cash, bolstering its corporate finances in a way that should help it endure any upcoming economic downturns. Moreover, Air Products & Chemicals has a track record of performing reasonably well during past recessions.
Consider the company’s performance during the 2007-2009 financial crisis for evidence of this:
- 2007 adjusted earnings-per-share: $4.40
- 2008 adjusted earnings-per-share: $4.97 (13% increase)
- 2009 adjusted earnings-per-share: $4.06 (18.3% decline)
- 2010 adjusted earnings-per-share: $5.02 (23.6% increase)
Air Products & Chemicals experienced an 18.3% decline in adjusted earnings-per-share in 2009 during the financial crisis, but the company’s bottom line surged to a new high by 2010.
The company also remained highly profitable in 2020, a difficult year for the global economy due to the coronavirus pandemic. The U.S. economy entered a recession as a result of the pandemic, but Air Products & Chemicals experienced only a mild dip in earnings, which allowed it to continue raising its dividend.
Valuation & Expected Total Returns
With a 6% expected growth rate, in addition to a 3.0% dividend yield, one might anticipate high single-digit annual returns from the security. However, it is imperative to consider how valuation can impact future returns.
Using $12.35 as the expected fiscal 2024 adjusted earnings-per-share, and a share price of $238, the security is currently trading hands at 19.3 times expected earnings. For context, the stock has traded at an average earnings multiple closer to 18 over the last 10 years.
We believe that 19 times earnings is a fair valuation estimate for Air Products & Chemicals, meaning shares are slightly overvalued. Mean reversion to a price-to-earnings ratio of 19 could lower annualized returns by 0.3% over a 5-year time horizon.
As such, we expect total annual returns to consist of the following:
- 6% earnings-per-share growth
- 3.0% dividend yield
- -0.3% P/E multiple compression
We expect total annual returns of 8.7% per year through 2028.
Final Thoughts
Air Products & Chemicals is a strong dividend growth stock, having raised its dividend each year for the past 42 years.
The company has de-risked its business model and that business transformation allows it to focus on its core business of industrial gases.
Moreover, it has a large slate of new projects to help stay on track for growth in the coming years. This should benefit shareholders in the form of continued dividend increases on an annual basis.
With expected annual returns of 8.7%, we rate the stock as a hold right now.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 54 stocks with 50+ years of consecutive dividend increases.
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: