Dividend Aristocrats In Focus Part 9: Air Products & Chemicals, Inc. (APD)

Valuation & Expected Total Return

Because it is a high-quality company with a profitable business model and a runway for future earnings growth, Air Products’ stock deserves a premium valuation multiple. The stock currently trades for 22 times earnings, which is nearly on-par with the S&P 500. As a result, there could be an argument made that Air Products stock is either a bit to cheap or trading around fair value given the elevated overall market level.

The company’s average price-to-earnings ratio was above 20 in both 2014 and 2015. Prior to that, the company’s price-to-earnings ratio hovered around 14 to 16 from 2009 through 2013. Air Products is another example of a business that is trading at elevated levels (likely) due to ultra low interest rates. It’s trading at reasonable prices given today’s bloated valuation levels, but is likely overvalued on a historical basis.

Air Products’ future returns will be comprised of earnings growth, which is likely to be in the high single digit, 7%-9% range. This target is in line with historical growth over the last decade.

In addition, shareholders will earn a return from the dividend. Air Products stock pays $3.44 per share in current annual dividends. The annual dividend amounts to a 2.6% current dividend yield. As a result, Air Products shareholders can reasonably expect 9.6%-11.6% annual returns going forward.

Final Thoughts

Air Products & Chemicals, Inc. (NYSE:APD) has a long track record of raising its dividend. It should be able to continue its streak for many years going forward. Air Products is experiencing significant margin expansion.

It will return significant amounts of earnings in the form of rising dividends. Air Products stock is a solid long-term hold for dividend growth investors looking for exposure to the industrial gas industry, or the basic materials segment.

The company currently ranks in the top one third of the Sure Dividend database using The 8 Rules of Dividend Investing thanks to its reasonable payout ratio, solid-but-not-spectacular yield, decent valuation, stability, and fairly strong growth. The company’s stock doesn’t ‘stand out’ in any one metric, but it does score reasonably well on all metrics.

Note: This article is written by Bob Ciura and originally published at Sure Dividend.