Air Products and Chemicals, Inc. (APD) has rewarded shareholders with 38 consecutive years of dividend increases and is in the process of spinning off a non-core business to create further value.
This industrial gas business shares many competitive advantages with other stocks we own in our Top 20 Dividend Stocks portfolio, but is now the time to buy it?
Business Overview
APD was founded in 1940 and has grown to be a world-leading industrial gas company. APD provides atmospheric and process gases and related equipment to manufacturing markets, including refining and petrochemical, metals, electronics, and food and beverage. The business is also very international – sales in North America accounted for just 42% of APD's total revenue last year.
The company is in the process of spinning off its Materials Technologies business by September 2016. This business accounted for 21% of APD's sales last year and serves the semiconductor, polyurethanes, cleaning and coatings, and adhesives industries. After the spin-off, APD will be focused completely on industrial gases.
Business Analysis
Industrial gases are a commodity, which means that the lowest cost provider usually wins out. However, industrial gas providers actually have strong moats in their areas of service.
Gases are hard to ship. For example, liquid oxygen put in a tanker will evaporate after 200 miles. As a result, industrial gas is a local business with competition limited to a radius no greater than a couple hundred miles.
Furthermore, APD has long-term contracts and relationships with many customers, making it challenging for new entrants to crack into its markets. Start-up costs are also very high (large manufacturing plants take around three years to construct), and there are many technical regulations that must be complied with.
Industrial gas companies are also attractive businesses because most of their products use a very cheap raw material – air. Even better, gas typically accounts for just a small portion of a customer's total manufacturing costs and is a non-discretionary expense, creating pricing power for APD. The industry is also characterized by a very slow pace of change, resulting in less risk of disruption.
APD is also taking self-help measures to improve its operations, in large part driven by pressure from an activist investor in 2013 and a new CEO starting in 2014. The company launched a strategic Five Point Plan two years ago that is intended to help it achieve its stated goal of being the most profitable industrial gas company in the world.
