February 15, 2012
Recently, Praxair (NYSE: PX ) floated a bond issue and included "to fund share repurchases under the company's share repurchase program" in the use of proceeds. Buying shares with borrowed money is a bold move and a little digging is in order to see if it's big-F Foolish or small-f foolish.
Here's a business snapshot:
|One sentence statement of operations
||Praxair is a global company that supplies atmospheric, process and specialty gases, high-performance coatings, and related services and technologies.
|Forward P/E (next 12 months EPS)
||Air Products and Chemicals (NYSE: APD ) and Airgas (NYSE: ARG )
Source: Yahoo! Finance.
Praxair trades at a premium P/E compared to the S&P 500 index and when taking growth into account, a higher PEG ratio (1.62) than competitors Air Products (1.46) and Airgas (1.29). The premium against the S&P makes sense if the economy is recovering, even slow and bumpy, since increased industrial production will drive demand for industrial gasses.
- Praxair has a share buyback plan that's actually reduced share count.
- The moderate dividend is covered by a payout ratio of only 36% and has been raised nineteen years in a row. And not little, dinky raises. Over the past five years the quarterly dividend per share has grown from 30 to 55 cents.
- $2.7 billion backlog of new projects.
- A global footprint includes exposure to Europe.
- The company trades at a premium to the broad market. I think it deserves the premium, but the stock falls in fairly valued territory.
A key difference between Praxair and competitors Airgas and Air Products is geography. Airgas generates nearly all its revenue from the US. Air Products is global, but doesn't cover South America -- home to the "B" in BRIC. Praxair has operations spread across the Americas, Europe and Asia. The top contender from these three depends on an investor's outlook for the world. Believe the US will lead a recovery? Then Airgas should be on the 'further study' list. Think South American countries are finished growing, but want the rest of the world? Researching Air Products should be on a to-do list. Don't know which part of the world will see the best growth (like me)? Praxair should be on a Watchlist.
Bonds for a Buyback
With Praxair's fair valuation, dividend yield is just a bit under the new bond's coupon rate --2.45% -- and record-low interest rates, I think issuing bonds to buy shares is pretty smart. The company hasn't gone overboard and its bonds still carry strong credit ratings. Praxair earns an outperform CAPScall on my scorecard and a place on My Watchlist.