Air Products and Chemicals: Dividend Stock Analysis

| About: Air Products (APD)

Air Products and Chemicals, Inc. (NYSE:APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company operates through five segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials and Equipment and Energy,. The company is member of the S&P 500 and the S&P Dividend Aristocrats indexes. Air Products and Chemicals has paid uninterrupted dividends on its common stock since 1954 and increased payments to common shareholders every year for 29 years. The most recent dividend increase was in March, when the Board of Directors approved a 18.40% increase to 38 cents/share. The major competitors of Air Products and Chemicals include Praxair (NYSE:PX), Airgas (ARG) and Air Liquide (OTCPK:AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.60% to its loyal shareholders. Click to enlarge:

The company has managed to deliver an impressive increase in EPS of 9% per year since 2001. Analysts expect Air Products and Chemicals to earn $5.67 per share in 2011 and $6.32 per share in 2012. This would be a nice increase from the $4.74/share the company earned in 2010. Near term increases in EPS would be derived from higher volumes sold as well as cost saving initiatives at the company. Higher industrial gas volumes are propelled by the rebound in the wold economy, particularly in sectors such as electronics and petroleum refining. The industrial gases industry is typically characterised with high capital costs as a barrier to entry. However the amount of industrial gases has typically grown at twice the rate of the economy in the past. Click to enlarge:

Over the past decade, the return on equity has mostly ranged between 15% and 21%, with the exception of 2003 and 2009. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. Click to enlarge:

The annual dividend payment has increased by 10.40% per year since 2001, which is higher than the growth in EPS. A 10% growth in distributions translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1983, we see that Air Products and Chemicals has indeed managed to double its dividend every seven years on average. Click to enlarge:

Over the past decade the dividend payout ratio has mostly remained below 50%, with the exception of a brief spike in 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Click to enlarge:

Currently Air Products and Chemicals is trading at 18.80 times earnings, yields 2.60% and has a sustainable dividend payout. The stock meets my entry criteria and I would add to my position in it subject to availability of funds.

Disclosure: Long APD