Praxair's Not Just Hot Air

• Email
• Share
• Print

Since the dividend tax reduction last year, a lot of strategists have been extolling the virtues of buying stocks that have dividends. This makes sense -- having a steady stream of dividends can increase total return and reduce volatility.

One successful strategy has been to buy stocks of companies that have a history of raising the annual dividend. One such company is Praxair (NYSE: PX), with better than 10 years of increasing its dividend. It currently yields 1.6%. Why is this so important? Dividends can be a way to gauge the health of a company. A track record of dividend increases can be thought of as a way to gauge the health of growth.

That's a nice introduction for Praxair, but are there other reasons to buy the stock? Maybe so. Praxair is a chemical company that specializes in industrial gasses, coatings, and the technology and support that accompany those products. Praxair does business with companies in every segment of industry.

The stock had revenue growth last year of 9.5%, almost double the industry average. Both gross and operating margins, at 40.9% and 16.6% respectively, are far ahead of the industry as well. A trailing price/earnings of 19.9 is in line with the sector. The biggest fly in the ointment is that Praxair trades at a relatively expensive two times sales.

Praxair is not content with the status quo. It is devoted to new lines of business in fuel cells, superconductivity for energy transmission, and technology to reduce greenhouse gasses. Some of these research and development projects seem like a logical fit and some do not. Even research in areas that don't seem to fit at first can be a good thing because real growth will come from integrating different businesses into its current product lines. This innovation is what should allow the company to maintain growth in the dividend.

I think the biggest risk to Praxair shareholders is more of a market risk. The company has proven it can execute well. The stock is likely to lag the market if and when cyclicals rotate out of favor. The dividend will be a buffer to returns when that happens.

One interesting nugget is that Praxair's stock tends to zig when technology stocks zag. This can be important. We all know someone who can't resist the allure of just one more exciting tech stock. A stock like Praxair can help balance out this affliction.

Although it's remarkable that Praxair has consistently raised its dividend, the 1.6% yield isn't enough for Motley Fool Income Investor's Mathew Emmert. Want to know which companies make the cut? Sign up for a 30-day free trial.

Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.