A Look Back at Air Products & Chemicals
An industrial play at all time highs
About a year ago I analyzed Air Products & Chemicals APD 0.00%↑ an American industrial company focusing on providing its clients with industrial gases.
A year after I thought the company was overvalued, the stock price has continued to go up, and so its time for me to go back and check to see if anything meaningful has changed about the business.
You can read the original analysis here:
The Thesis
The first thing we need to take into consideration is to see what I thought about the company, and what my thesis for the investment was:
Diversified stable business with good margins
Some sovereign risk is in play and must be accounted for
A long history of returning capital to shareholders
Fairly decent recent revenue and earnings growth
Low chance of default and debt and other commitments are under control
Lack of buybacks mean reduced EPS growth (not necessarily bad!)
How has this held up?
Let’s take it point by point:
Diversified stable business with good margins
The company hasn’t really changed here. They haven’t spun-off any portion of their business, and their margins remain high compared to most industrials.
Some sovereign risk is in play and must be accounted for
This past year has seen a rash of nationalizations (state theft) in the oil and gas sector, as a result of the fall out of the conflict in Ukraine and its related response from the EU and its member states.
This is naturally a terrible thing for investors, and everyone in general, and while APD 0.00%↑ has managed to avoid this directly, it should still heavily weight on their decisions to invest going forward.
No one wants to spent $1 billion on infrastructure only to have it taken from them the moment it becomes politically convenient.
A long history of returning capital to shareholders
The company has continued its tradition of annual dividend raises, with the latest increase from $1.62 to $1.72 being effective as of the 1st quarter of 2023.
Ultimately though the capital returns have left something to be desired, with nothing in the way of buybacks in the past decade or so.
While the dividend is reliable, and unlikely to be cut any time soon, the low yields brings into question just how much of the returns are based on future improvements to the business…
Fairly decent recent revenue and earnings growth
Revenue has increased dramatically over the past couple of years, though earnings have remained remarkably stable throughout.
Nothing here has really gone differently from expected.
Low chance of default and debt and other commitments are under control
The last quarter saw quite a significant jump in the amount of long term debt, partly explained by an equivalent increase in property plant and equipment.
At the end of the day its this infrastructure that is underlying to the business, and so investments here should theoretically result in higher revenues and subsequently earnings.
That said, with the increase in interest rates, so comes an increase in the minimum required hurdle rate to justify such investments, and it’s difficult to determine as of yet whether these investments will pan out and be able to justify the debt incurred for them.
Lack of buybacks mean reduced EPS growth (not necessarily bad!)
Let’s be clear here, the company is overvalued and should not be buying back stock.
But at the same time, the lack of buybacks does negatively impact the companys EPS growth and makes the business less attractive.
So far the low dividend yield and lack of buybacks does not seem to have impacted demand for the stock, but at the end of the day gravity always wins and it’s important to realized that ultimately the value of a business comes from the capital it returns to the shareholders.
Will the low yield and no buybacks be overcome by incredibly high revenue and earnings growth in the future? Maybe, or maybe not depending on the prevailing discount rates.
The future
Overall the company has done well, and that has been reflected in the share price.
APD 0.00%↑ is trading at a 22 PE with a dividend yield of only 2.56% which is significantly below the treasury rate. At the end of the day a bet on APD 0.00%↑ is a bet on their continued (and increasing) growth, something which i’m not willing to bet on.
In my view the risk/reward benefit just isn’t there for the company at these prices, and so I remain uninvested in this otherwise stellar business.
My stance: HOLD
Do you own APD 0.00%↑? Let me know what you think of the business in the comments below.