Why Air Merchandise & Chemical substances Deserves A Spot In Your Portfolio (NYSE:APD)

Introduction

On August 30, I wrote an article titled “Dividend Kings Are Overrated.” In that article, I defined that though dividend consistency is a good factor, dividend shares ought to by no means be chosen based mostly on Dividend Aristocrat or Dividend King standing.

That mentioned, there are many good Dividend Aristocrats in the marketplace who’re nonetheless able to elevated progress. One among them is Air Merchandise & Chemical substances (NYSE:APD).

I used to be “fortunate” to name the underside on February 6, after I gave the inventory a Sturdy Purchase ranking after a fairly disagreeable sell-off. Since then, shares have returned almost 30%, greater than twice the 14% return of the S&P 500.

My most up-to-date article on this firm was revealed on Might 1, after I known as it “The Good Combo Of three% Revenue, Progress, Nice Valuation.” Since then, it has returned 20%. Over the previous 10 years, APD shares have lagged the S&P 500, primarily as a result of post-pandemic points.

Therefore, in mild of current successes, it appears the corporate is again on observe.

As we are going to talk about on this article, Air Merchandise & Chemical substances is doing wonderful. Regardless of challenges, the corporate is rising its EBITDA, upbeat about its EPS outlook, rewarding shareholders with constant dividend progress, and benefitting from new partnerships.

So, let’s preserve this intro quick and get proper to it!

The Return Of Progress

With greater than 40 consecutive annual dividend hikes, Air Merchandise & Chemical substances is a Dividend Aristocrat. Nevertheless, it’s greater than that. The $62 billion market cap firm is the most important hydrogen provider on this planet, an proprietor/operator of greater than 750 manufacturing amenities in roughly 50 nations, and an organization that serves greater than 30 industries, making it a mission-critical firm within the international chemical provide chain.

Proper now, nevertheless, the worldwide chemical business is struggling a bit from weak international progress. Though sure cyclical areas are doing nicely, due to new progress drivers like automation, synthetic intelligence, and financial re-shoring in North America, indicators just like the ISM Manufacturing Index trace at very weak demand in cyclical industries.

As we will see beneath, the second the ISM Manufacturing Index peaked, the APD inventory worth misplaced momentum.

The excellent news is that APD’s financials are more and more good.

Final month, the corporate launched the third-quarter outcomes of its 2024 fiscal yr. These numbers have been fairly upbeat, as the corporate noticed a 5% increased EBITDA to $1.3 billion, pushed by increased margins and a positive enterprise combine, that means pricing offset some weak point in volumes (see beneath).

Because of this, adjusted earnings per share rose to $3.29. This interprets to a 7% year-over-year enhance.

If we take a more in-depth have a look at its regional efficiency, within the Americas, EBITDA elevated by 6%, supported by a 400 foundation factors enhance in EBITDA margins. This was supported by each pricing and secure volumes.

Europe noticed a 12% enhance in EBITDA and a 500 foundation factors enhance in margins. This was primarily as a result of new property in Uzbekistan and declining energy prices.

Each Asia and the Center East/India struggled with weak volumes, pricing headwinds, and deliberate upkeep.

Thus far, so good.

What issues is that the corporate is seeing success in progress tasks and profitability. This bodes nicely for shareholders.

APD Shareholders Have A Vibrant Future

In its earnings name, the corporate introduced an settlement with TotalEnergies (TTE). Beginning in 2030, Air Merchandise will provide 70 thousand tons of inexperienced hydrogen per yr.

This deal each helps the corporate’s long-term progress technique and exhibits how excessive demand is for inexperienced hydrogen – particularly in markets like Europe.

The corporate additionally offered its LNG Course of Expertise and Gear enterprise to Honeywell (HON). The deal was price $1.8 billion and allowed APD to give attention to its core enterprise, which features a collaboration with Mercedes-Benz to develop gasoline cell vans and construct a community of business hydrogen fueling stations.

On prime of that, the corporate continues to show its working excellence, because it has an EBITDA margin of 42%, the very best in its business.

Even higher is the truth that margins are simply 30 foundation factors shy of their 2020 all-time excessive, which has introduced again a whole lot of confidence after the corporate struggled to take care of its margins in 2021 and 2022.

Going ahead, the corporate continues to depend on its “two-pillar” technique.

This technique is what units it other than smaller startups within the chemical house with far more operational dangers, as its two pillars are based mostly on increasing its core industrial gases enterprise (the primary pillar) whereas main within the supply of low-carbon hydrogen on an more and more massive scale (the second pillar).

Basically, the twin focus helps its monetary progress and likewise makes it a pacesetter in rising applied sciences with out elevated monetary dangers, because it has an enormous core enterprise to finance progress. Startups counting on exterior funding don’t have that profit.

In mild of investments, the corporate has a return on capital employed (“ROCE”) of 11%. Excluding money, that quantity is 12%.

On prime of that, it enjoys an A-rated stability sheet with a internet leverage ratio of lower than 3x EBITDA.

On a full-year foundation, the corporate expects EPS within the vary of $12.20 to $12.50. This means 6% to 9% progress and would lengthen the corporate’s progress streak, which has an 11% CAGR since 2014(!).

That is improbable information for shareholders.

• APD has hiked its dividend for 41 consecutive years. This clearly contains the Nice Monetary Disaster, the 2015/2016 international manufacturing disaster, the pandemic, and the difficult post-pandemic years.
• Regardless of its age and lengthy historical past of dividend progress, the dividend has grown by 9% per yr since 2014.
• Presently, APD yields 2.5% with a 58% payout ratio.

The valuation is not unhealthy, both.

Valuation

Regardless of its current rally, APD shares are nowhere close to their highs, which is sensible, because the working surroundings remains to be difficult.

Nevertheless, it additionally bodes nicely for the valuation, as the corporate is likely one of the few shares in the marketplace not buying and selling a mile above its common a number of.

Utilizing the information within the chart beneath, APD trades at a blended P/E ratio of twenty-two.7x, which is barely beneath its 10-year common of twenty-two.9x.

Utilizing the FactSet knowledge within the chart above, analysts anticipate 7% EPS progress in 2024 to be adopted by 9% progress in each 2025 and 2026, respectively.

This means a good inventory worth of $336, 20% above its present worth.

Though it’ll probably require a backside in main indicators just like the ISM Index to permit for a sustainable rally, I consider APD stays in an amazing spot to return >10% per yr going ahead, making it an amazing inventory for a variety of dividend traders.

Takeaway

Air Merchandise & Chemical substances is proving its resilience and progress potential regardless of very difficult market situations.

The corporate’s strategic give attention to its core industrial gases enterprise and management in low-carbon hydrogen is paying off, supported by a powerful monetary efficiency in 3Q24, a powerful margin restoration, and strategic partnerships to gasoline long-term progress.

Furthermore, with a return on capital employed of 11%, an A-rated stability sheet, and constant dividend progress (41 consecutive years), I consider APD affords a compelling funding case.

Therefore, even after its current rally, APD’s valuation stays engaging, positioning it for sustained capital positive aspects.

Professionals & Cons

Professionals:

• Sturdy Dividend Progress: APD has 41 consecutive years of dividend hikes, together with throughout main downturns just like the Nice Monetary Disaster and the pandemic, with a 9% annual progress price since 2014.
• Stable Financials: The corporate enjoys a 42% EBITDA margin – the very best in its business. It additionally has an A-rated stability sheet with a internet leverage ratio of lower than 3x EBITDA.
• Strategic Progress Focus: APD’s two-pillar technique of increasing its core gases enterprise and main in low-carbon hydrogen places it in an amazing spot for long-term progress with out elevated monetary dangers.

Cons:

• Difficult Market Situations: Weak international progress and cyclical headwinds may weigh on APD’s near-term efficiency.
• Valuation Close to Historic Averages: Whereas the valuation is much from unhealthy, APD’s P/E ratio is close to its 10-year common, which may restrict short-term upside until financial situations enhance. Nevertheless, if financial situations enhance, I anticipate analysts to improve their long-term EPS progress expectations.
• Regional Weaknesses: Whereas the Americas and Europe are performing nicely, Asia and the Center East/India are going through quantity and pricing challenges, which may final till we get a broader financial upswing.