Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend champion has paid distributions since 1954 and increased dividends on its common stock for 32 years in a row.
The company's last dividend increase was in March 2014 when the Board of Directors approved an 8.50% increase to 77 cents/share. The company's largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.20% to its shareholders.
The company has managed to deliver 5.70% in annual EPS growth since 2004. Analysts expect Air Products and Chemicals to earn $6.47 per share in 2015 and $7.26 per share in 2016. In comparison Air Products and Chemicals earned $4.59/share in 2014. Earnings per share does look a little lower than usual, due to one-time items.
The annual dividend payment has increased by 11.20% per year over the past decade, which is higher than to the growth in EPS. Given the fact that earnings per share have been largely flat for the past five years, dividend growth has been running on fumes, mostly through the expansion of the dividend payout ratio. Without earnings growth, there is a limit to where dividends can rise. However, without certain one-time items, earnings per share are actually better off. Therefore, I am not worried in the case of Air Products & Chemicals.
An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven and a quarter years on average.
The dividend payout ratio increased from 40% in 2005 to 65.80%. This is a direct result of dividend growth exceeding earnings growth. Normally, I do not like seeing dividend payout ratios above 60%. In Air Products & Chemicals case however, I think that the payout is sustainable based on expected earnings in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Air Products and Chemicals is overvalued at 23.60 times earnings, yields 2% and has an adequately covered dividend. I would find the shares more appealing on dips below $123/share, equivalent to an entry yield of 2.50%. I do not plan on adding to this position however, since this is one of the largest holdings in my portfolio. However, I do expect to hold on to this stock.
Full Disclosure: Long APD
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