Air Products & Chemicals (APD) is an multinational industrial gas producer founded in 1940. Currently company generates more than $10b of sales, employs above 20 000 people and operates in more than 50 countries.

Company supplies industrial gases mainly oxygen and nitrogen but also other professional gases. Moreover around 20% of EBITDA is generated in Material Technologies (which is about to be separated).

Geographical split of sales: US/Canada 42%, Asia 28%, Europe 24%, Latin America 6%

Company offers different supply modes.

image001

It is worth emphasizing that many contracts are long term.

The goal of company: Air Products will be the safest and the most profitable industrial gas company in the world, providing excellent service to our customers. It is important for me that company puts a strong emphasize on safety.

I also like a lot management philosophy:

image002

Effectiveness can be seen for example in rising EBITDA margin. The question is where is the peak.

Outlook on 2016 is moderately optimistic:

image003

As I wrote earlier company want to separate Material Technology business.

image004

I am not a strong follower of this idea, cause I am looking from a dividend perspective and I am not sure whether MT business alone will be able to deliver dividend growth for the next 10+ years.

 

As it comes to financials (estimates):

Market cap ~ $29B

Net debt ~$5B

Payout ratio ~45%

ROE ~18%

Beta = 1.3

Dividend yield 2.7% + buyback (rather not significant)

 

Estimated valuation ratios:

EV/EBITDA = 10.7

P/E = 18.3

Fiscal year ends 30 September.

 

Air Products & Chemicals is one of The Dividend Aristocrats with history of increasing dividend payments since 1983 year. Currently dividend yield is around 2.7% and it is in line with historical average – no special occasion. In 2009 dividend yield spiked to around 4%. Dividend growth rate for the last 3 years was on average high single digit.

 

Drawdown risk analysis:

image005

Share price was very volatile last days. In meantime it was around $116 which means drawdown of around 25%. It was a nice level, nevertheless historically drawdown of more than 40% occurred few times. If we look on multiples even with $116 company is not cheap, around 9 times EBITDA and 16 times earnings. I think I can find other opportunities for me, which are cheaper and gives higher yield. But if share price falls to arund $100 I think it will be a time to buy.

 

Summing up, APD is a high quality business with a strong competitive advantage. I like the business model but I do not like separating MT and (which is far more important) I do not like valuation. For me is simply too expensive now. But I will have a look and in case of bigger drawdown I will buy some shares.

 

Disclaimer APD – no position