Air Products & Chemicals: Poised for Gains

 | Jun 14, 2013 | 9:00 AM EDT
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As we discussed last week, we think higher dividend paying stocks still make a lot of sense and should contribute positive returns to portfolios in the upcoming year. Nevertheless, as interest rates have been and are expected to continue drifting higher, it is critically important to diversify within the higher yield area.

We continue to find more economically sensitive stocks attractive within the high yield group. A significant positive is that the factors that will drive interest rates higher are also likely to cause these economically sensitive stocks to experience a pick-up in their businesses and earnings which should be nice positives for the stock.

One solid dividend payer that we think will benefit by the improving economy is Air Products & Chemicals (APD). The shares have had a nice double-digit gain since the beginning of the year and have continued to rally into recent sell-off in other dividend driven sectors such as electric utilities and consumer staples.   

Air Products is one of the leading producers of industrial gases such as oxygen, nitrogen, helium and hydrogen. Business has been relatively flat over the past year due to weak demand in Europe, North America and Asia. While a number of the customers are very stable such as in foods, beverages and healthcare, others are in the more cyclical industries such as autos, industrial equipment and metals. The weak global economy weighs on this portion of the business.

Business is expected to remain muted throughout 2013. Fortunately, management has been very proactive with new business bookings of $3 billion and growing. Management has also been very aggressive at reducing operating costs several hundred million dollars per year to maintain margins. The board is expected to increase the dividend in the range of 6% to 9% per year.  Air Products currently has an attractive dividend yield of 3.0%.

Valuation levels are also attractive at 16 to 17 times earnings. Air Products typically trades for 17 to 19 times earnings. The company has a strong balance sheet and is committed to an A rated investment grade rating.   

Investors' expectations for the name should improve over the next year or two as the dividends continue to grow and the business improves. Air Products should be one of the few select high dividend yielding stocks that should see positive earnings growth and multiple revaluation in a better economy and higher interest rate environment in the upcoming 12 to 24 months.

At the current price, we would be buyers of the name with an upside target of $115 and strong dividend support. 

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