How Safe Is Air Products & Chemicals' Dividend?

Many investors aren't familiar with the business in which Air Products & Chemicals (APD 1.17%) specializes, providing the atmospheric and process gases necessary for manufacturers in the metals, electronics, food and beverage, and petrochemical industries to make their products. With operations in 50 countries, Air Products has a global presence, and it has also established a long history of treating its shareholders well by paying ever-increasing dividends on its stock. Air Products enjoyed stellar stock performance in the early 2010s, but more recently, the company has seen growth in its share price stall out. Let's take a closer look at Air Products & Chemicals to see whether investors can be confident in its ability to keep its dividend moving higher.

Dividend stats on Air Products & Chemicals

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

Dividend yield

Air Products' dividend yield of 2.6% is above the average for the S&P 500 right now, giving investors the generous income they often need from their dividend stock portfolios. Yet the yield isn't inordinately high either, suggesting a solid middle ground that provides both income and safety. The payout is consistent with Air Products' practices in the past, as the company's dividend yield has stayed in a fairly consistent range of 2% to 3.5% since the beginning of the decade. Air Products has seen its yield move toward the lower end of that range since its big share-price run-up between 2013 and 2015, but as we'll see, dividend increases have been able to keep pace with stock performance over that timeframe.

Image source: Air Products.

Payout ratio

Despite its healthy dividend yield, Air Products & Chemicals isn't overextending itself with what it chooses to pay shareholders. The company's payout ratio is quite conservative, typically ranging between 40% and 60%. The current reading below 30% reflects one-time gains that have temporarily inflated Air Products' earnings, and if you account for near-term profit expectations, the figure climbs to around 55% to 60%. Nevertheless, that level provides Air Products with plenty of margin for safety even under sluggish business conditions.

Dividend growth

Air Products & Chemicals has a long history of dividend growth, having boosted its annual payouts for 35 consecutive years. That qualifies the industrial gas giant as a Dividend Aristocrat, and moreover, the pace of Air Products' dividend increases has remained impressive. Its most recent increase amounted to a nearly 11% rise. Air Products' dividend growth has accelerated since the mid-2000s, as the company has experienced generally solid business conditions and has rewarded its shareholders appropriately.

APD Dividend data by YCharts.

What's happened with Air Products & Chemicals lately?

Air Products & Chemicals is still adapting to some significant challenges that it identified in recent years. In late 2015, the company said that it would spin off its materials technology division in order to focus more strongly on industrial gases, because the competitive situation in the industry had gotten tough enough that Air Products needed to be able to adapt more nimbly to keep up with and surpass its rivals. The strategic vision at the time encompasses a combination of decentralization and new plant investment in areas across the world, including Saudi Arabia and South Korea.

The presence of activist investor Bill Ackman provided some incentive for Air Products to move forward. Ackman first acquired a nearly 10% stake in the company back in 2013, putting independent directors on the board and spurring former CEO John McGlade to retire. Now, however, Ackman apparently believes that his work with Air Products is done, as his Pershing Square hedge fund sold off its entire position in the company as of mid-2017.

What to expect from Air Products & Chemicals

Air Products faces the dilemma of whether to return more capital to shareholders or to seek out new opportunities for investing in its core business. The likely result will be a balance of both, as its most recent double-digit percentage dividend increase signaled. Investors aren't entirely sure that the company will see much in the way of earnings growth in the coming years, and that could put a bit of stress on Air Products. With a conservative payout ratio, however, Air Products has the stability to get through a competitive period without endangering the dividend.