Shares of Air Products and Chemicals (APD +1.39%) have been a great inflation hedge over the last year. Prices for everything from energy to manufacturing materials have soared, but Air Products has been able to offset higher input costs and keep profitability rising steadily. Since the start of 2022, the stock is down just 5% (when accounting for dividend payments), compared to a negative 15% return for the S&P 500 and negative 26% for the Nasdaq Composite.
This top supplier to the manufacturing sector (including the semiconductor industry) and developer of natural gas, hydrogen, and renewable energy projects is now down 10% from all-time highs reached late in 2022. Is this dividend stock a buy now?
NYSE: APD
Key Data Points
New industrial and energy projects still progressing
After a decade of under-investment in infrastructure, the world is suddenly aware of the need to pour some money into hard assets that support energy and industrial production. Companies like Air Products that supply equipment and sell industrial gases are benefiting from this renewed interest in the physical economy.
Air Products itself has a number of major projects underway. New project commitments include what will be the largest green hydrogen facility in the U.S. (in Texas) and a semiconductor manufacturing industry project in Taiwan (rare gases like neon and xenon that Air Products supplies are a key ingredient in chipmaking). To support these new ventures, Air Products says it will spend at least $5 billion in capital expenditures (property, plant, and equipment) in 2023 -- up from $4.65 billion in 2022 and more than double the capital expenditure outlays of the pre-pandemic era ($2.1 billion in 2019).
Even after its elevated capital expenses in the last year, Air Products generated nearly $3.1 billion in free cash flow in calendar year 2022, nearly half of which was paid out as a dividend (which currently yields 2.5% a year). Based on its stable flow of cash from existing operations and solid balance sheet, Air Products has billions of dollars left over to deploy in support of its customers' needs.
Nevertheless, the market seems to be disappointed that Air Products' latest financials (first-quarter fiscal 2023, the three months ended in December 2022) came in a bit light. Sales and adjusted earnings per share (EPS) were both up just 6% year over year. As in past quarters, both revenue and EPS were negatively affected by a strong run-up in the value of the U.S. dollar, a side effect of the U.S. Federal Reserve's interest rate hikes last year.
A buying opportunity for this top dividend stock?
Though Air Products stock has sold off a bit from highs, management did reiterate its guidance for year-over-year adjusted EPS growth of 9% to 12% for fiscal 2023. The long-term guide for average adjusted EPS growth in a high-single-digit to low-teens percentage also remains intact, given the company's big pipeline for projects supporting manufacturing and renewable energy projects over the next five years.
Granted, even after a sell-off, the stock might still be too richly valued for some investors. Air Products currently trades for nearly 28 times trailing 12-month earnings, and 22 times one-year forward expected earnings.
However, the stock carries a premium for good reason. It has an excellent balance sheet and is well entrenched in the industrial sector as a top gases and equipment supplier. The company could also be an ancillary beneficiary from both the U.S. CHIPS Act (aimed at bolstering manufacturing of semiconductors) and the Inflation Reduction Act (funding for renewable energy, among other things).
If Air Products and Chemicals still looks a bit too pricey, you might consider buying a few shares using a dollar-cost average plan at this point. Either way, I don't think this stock will get too "cheap" anytime soon given the secular growth trends working in its favor. At the very least, keep a close eye on this top industrial dividend stock.
