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.

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