Praxair, Inc. (PX): Strong Moat, 20+ Years of Dividend Growth, But Macro Headwinds Persist

Despite PX’s exposure to numerous industrial markets, the company’s performance during the financial crisis was very good. Sales fell by 17% in 2009, but the company expanded its operating margins each year and actually grew earnings. When sales growth slows, PX actually has more free cash flow to work with because it doesn’t need to invest as much in growth capex.

Source: Simply Safe Dividends

Courtesy of the company’s annual report, we can see that PX has generated higher operating margins than the industry average while demonstrating remarkable stability during each of the five recessions over the last 25+ years.

Source: Praxair Annual Report

Not surprisingly, PX has generated free cash flow in each of the last 10 years. The long-term, take-or-pay contracts and strong pricing power of the business make it a big cash generator despite the capital intensity. Management has stated that roughly 75% of the company’s capex today is related to growth projects, not maintenance work. PX will really be a free cash flow machine when its long-term reinvestment rate slows, but we don’t expect that to happen anytime soon. The company’s capex was elevated from 2011-2014, and it should start seeing the benefits from these growth investments in late 2016 and beyond.

Source: Simply Safe Dividends

Turning to the balance sheet, PX maintains a lot of debt relative to its cash on hand and earnings power. We would be concerned by this is the company wasn’t such a dependable free cash flow generator in almost every macro environment.

Furthermore, we believe free cash flow generation will improve over the next several years as growth capex moderates and new projects start generating revenue. It’s also worth noting that the rating agencies have assigned PX an “A” credit rating, and the company has noted it will do anything to maintain its current status with the agencies.

Source: Simply Safe Dividends

Altogether, PX’s dividend looks pretty safe. The company’s payout ratio is reasonable, it generates cash flow in practically any environment, and its strong credit rating should provide it with access to capital markets in the event that any negative surprises surface.