Why Air Products & Chemicals, Inc. (APD)’s Stock Is Worth Owning

The next selection for the Inflation-Protected Income Growth Portfolio is one of the few companies in the world that has figured out how to profitably sell air: Air Products & Chemicals, Inc. (NYSE:APD) . Part of a triumvirate of air chemical companies that also includes Praxair, Inc. (NYSE:PX) and Airgas, Inc. (NYSE:ARG), Air Products & Chemicals has the best overall fit among its peers for this real-money portfolio.

With a 30-year history of growing its dividend, a reasonable payout ratio, and decent forward-looking prospects, it’s the kind of company that looks capable of helping investors breathe easier. And if for some reason it doesn’t help them breathe easier financially, at least it does offer medical-grade oxygen to help them physically breathe easier.

Air Products & Chemicals, Inc. (NYSE:APD)Why it’s worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

1). Payment: The company’s dividend currently sits at $2.56 a share, a yield of about 2.9% based on Tuesday’s closing price.

2). Growth history: The company has raised its dividend every year for the past 30, with the most recent being a raise from $0.58 to $0.64 about a year ago.

3). Reason to believe the growth can continue: With a payout ratio of 46%, the company retains more than half of its earnings to invest for future growth. That reasonable payout ratio also gives the company flexibility to maintain its payment if that anticipated growth doesn’t materialize as quickly as hoped.

Balance sheet and valuation:

Balance sheet: A debt-to-equity ratio of around 0.9 indicates that the company does use debt, but it hasn’t overleveraged itself to the point where a near-term financial hiccup would derail it.

Valuation: The company easily passes a valuation test pioneered by none other than Benjamin Graham, the founder of value investing. That said, Graham’s equation does take interest rates into account, and today’s low rates make stock values seem cheaper than they would be in a more normal rate environment. Still, even dialing rates back up to more “normal” levels, it would look decently priced.

Diversification fit:
The previous picks for the portfolio included:

- An industrial conglomerate

- A generic-pharmaceutical powerhouse

- A provider of staple foods

- An auto parts distributor

- A safety equipment provider

- A high-tech (software) titan

- A toy maker

- An electric utility

- A shipping company

- A pipeline giant (though this one might actually get away)

- A drugstore

- A semiconductor superstar

- A two-for-one railroad special

- A fast-food juggernaut

- A medical device maker

- A supplemental insurance writer

As the first air chemicals company in the portfolio, Air Products & Chemicals fits pretty well from a diversification perspective.

Why pick it over its peers?
Still, as Air Products & Chemicals is part of that triumvirate of air chemical companies, it raises the question: Why select this company instead of one of the others? The table below shows some key measures that led to its selection:

Company Yield Payout Ratio 5-Year Estimated Growth Rate Debt-to-Equity Ratio Price-to-Earnings Ratio
Air Products & Chemicals 2.9% 46% 9% 0.9 15.7
Airgas 1.7% 35% 13% 1.2 22.3
Praxair 2.2% 39% 11% 1.1 19.7

Source: Yahoo! Finance, as of Feb. 5, 2013.

Air Products & Chemicals has the highest dividend yield of the group, which is an important consideration for this dividend-focused portfolio. With the lightest debt-to-equity ratio, it also is at the lowest risk of leverage-related failure — though none of the three look to be carrying outrageous debt levels.

While both Airgas and Praxair have lower payout ratios and higher anticipated growth rates, Air Products & Chemicals’ levels are reasonable. Indeed, with both a lower estimated growth rate and lower price-to-earnings ratio, in some sense, Air Products & Chemicals has a lower hurdle to clear to meet expectations.

Put it all together, and it means that among its peers, Air Products & Chemicals looks like the best overall fit for this portfolio.

What are the risks?
Of course, no investment is without risk. In Air Products & Chemicals’ case, one of the biggest risks is that of explosion. When your primary business line revolves around explosive or otherwise combustible gasses, it’s an ever-present industrial hazard. Fortunately, Air Products & Chemicals takes that risk incredibly seriously and has compiled what it calls the best safety record in the chemical industry.

The article Why Air Products & Chemicals’ Stock Is Worth Owning originally appeared on Fool.com and is written by Chuck Saletta.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!