Ahead of earnings, Air Products and Chemicals (APD 0.43%), an industrial gases giant and leader in liquefied natural gas (LNG) technology and equipment, said it would be making "a significant investment" at its LNG manufacturing facility in Florida. LNG usage is on the rise at home and abroad, and Air Products is a top way to invest in the trend.
But there's more. The company turned in a solid quarterly report and upgraded its full-year guidance thanks to the world's rising demand for more energy-efficient solutions. This is a magnificent growth-and-dividend stock that's worth a buy right now.
A best bet on LNG, hydrogen, and carbon capture
Air Products explains its operation in two basic segments:
- its core industrial gases business (LNG, but also gases used in manufacturing of everything from cars to electronics to food)
- hydrogen
First, let's look at the industrial gases business, which relates to that planned manufacturing expansion at Air Products' facility in Florida. LNG is a big global business, and it is on the rise as an alternative energy source to other fossil fuels. This new manufacturing upgrade will increase output by 20% for coil-wound heat exchangers (CWHE), which are wrapped around a central shaft to create heat exchangers used to turn natural gas into a liquid before transport.
A completed LNG heat exchanger manufactured at Air Products' Port Manatee, Florida, facility is being loaded on a carrier at the Port of Manatee for shipment to the customer. Image source: Air Products and Chemicals.
This system is at the heart of Air Products' industrial technology. It's a driving force of the company's growth right now as it supports its other industrial and manufacturing partners in their efforts to trim their energy use.
Image source: Air Products.
But the second segment, hydrogen, is starting to kick in and will also spur growth over the next three to five years. Renewable and clean energy is a growing priority for governments and businesses on all continents, and Air Products is a top partner. It has numerous irons in the fire, including a $2.5 billion hydrogen fuel expansion project in California for the airline industry (projected to open in 2025) and a $4.5 billion hydrogen fuel and carbon capture facility in Louisiana (projected to open in 2026).
Sustainable energy = sustainable investment growth?
Air Products has been a wonderful long-term investment, doling out dividend increases for more than 40 years now as it has steadily expanded. Growth over the last decade has been especially good, with the company touting its annual average 11% adjusted earnings growth and annual average 10% dividend payout increase. These have led to solid outperformance of the S&P 500 stock index when you factor in reinvested dividends.
Data by YCharts.
In the years ahead, Air Products is aiming for similar low-double-digit adjusted earnings growth and steady dividend hikes. With interest in the company's LNG and hydrogen technology rising, there appear to be decent odds that this next 5- to 10-year stretch could be even better than the last decade.
To wit, after a solid Q3 of fiscal 2023 (the three months ended in June), management updated its guidance for the current year. Adjusted earnings per share (EPS) are now expected to be up at least 11% over 2022 -- not bad for a year that was expected to feature a recession. And with manufacturers and developers investing a lot of money in LNG and hydrogen projects in the next few years, Air Products could have some solid earnings increases in the works through 2026.
For me, it all adds up to a top bet on renewable energy, and I'm still buying. Shares of Air Products trade for just under 25 times the midpoint of expected 2023 adjusted EPS. It isn't a cheap stock, but this looks like a very reasonable price tag if you assume low-teens-percentage EPS growth is the baseline, plus dividend increases, for the rest of the 2020s. If LNG and hydrogen stocks rank high on your investment priorities, Air Products and Chemicals is worth a look.
