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 superb factor, dividend shares ought to by no means be chosen primarily based on Dividend Aristocrat or Dividend King standing.

That stated, there are many good Dividend Aristocrats in the marketplace who’re nonetheless able to elevated development. One in all 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 Robust Purchase score after a relatively 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 Could 1, after I referred to 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’ll focus on on this article, Air Merchandise & Chemical substances is doing positive. Regardless of challenges, the corporate is rising its EBITDA, upbeat about its EPS outlook, rewarding shareholders with constant dividend development, and benefitting from new partnerships.

So, let’s preserve this intro brief 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. Nonetheless, it’s greater than that. The $62 billion market cap firm is the largest hydrogen provider on the earth, an proprietor/operator of greater than 750 manufacturing services 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, nonetheless, the worldwide chemical trade is struggling a bit from weak international development. Though sure cyclical areas are doing properly, due to new development 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 are able to see under, the second the ISM Manufacturing Index peaked, the APD inventory value 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 12 months. These numbers have been fairly upbeat, as the corporate noticed a 5% greater EBITDA to $1.3 billion, pushed by greater margins and a positive enterprise combine, that means pricing offset some weak spot in volumes (see under).

Consequently, 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 steady 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.

To date, so good.

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

APD Shareholders Have A Shiny 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 12 months.

This deal each helps the corporate’s long-term development technique and reveals 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 value $1.8 billion and allowed APD to deal with its core enterprise, which features a collaboration with Mercedes-Benz to develop gasoline cell vehicles and construct a community of economic hydrogen fueling stations.

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

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

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

This technique is what units it aside from smaller startups within the chemical house with far more operational dangers, as its two pillars are primarily based 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 development and likewise makes it a pacesetter in rising applied sciences with out elevated monetary dangers, because it has an enormous core enterprise to finance development. Startups counting on exterior funding would not 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 high 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% development and would lengthen the corporate’s development streak, which has an 11% CAGR since 2014(!).

That is unbelievable information for shareholders.

• APD has hiked its dividend for 41 consecutive years. This clearly consists of 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 development, the dividend has grown by 9% per 12 months since 2014.
• At present, APD yields 2.5% with a 58% payout ratio.

The valuation is not dangerous, both.

Valuation

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

Nonetheless, it additionally bodes properly 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 info within the chart under, APD trades at a blended P/E ratio of twenty-two.7x, which is barely under its 10-year common of twenty-two.9x.

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

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

Though it should seemingly require a backside in main indicators just like the ISM Index to permit for a sustainable rally, I consider APD stays in an awesome spot to return >10% per 12 months going ahead, making it an awesome inventory for a variety of dividend traders.

Takeaway

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

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

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

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

Professionals & Cons

Professionals:

• Robust 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 development price since 2014.
• Strong Financials: The corporate enjoys a 42% EBITDA margin – the best in its trade. 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 awesome spot for long-term development with out elevated monetary dangers.

Cons:

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