Industrial Gas Stocks as Dividend Plays

Published Mon, 16 Sep 2012 09:00 CET by TopYields.nl


Stocks in the cyclical industrial sector fare well when the economy enters an expansionary cycle. While the global economy is currently moving through a soft patch, a rebound in the economic activity expected after the resolution of the European sovereign debt crisis and re-acceleration of growth in the United States and China will bode well for the cyclical industrial stocks. Companies selling gases for industrial uses stand to benefit from the expected new trend. Although industrial gas companies are cyclical by nature, some of their business customers, such as food and healthcare services companies, are shielded from cyclicality. The biggest industrial gas players thus have stable revenue streams (and cash flows) based on long-term contracts with a broad range of clients, which enables gas companies to pay attractive dividends and makes them defensive income investments.

One of the industrial gases companies paying dividends is Praxair (NYSE: PX). The company is the largest industrial gases company in North and South America. It produces atmospheric gases, such as oxygen, nitrogen, and rare gases, and process gases, including carbon dioxide, helium, hydrogen, specialty gases, and acetylene. Praxair's dividend is yielding 2.0% annually on a payout ratio of 39%. Over the past five years, the company's EPS and dividends increased at average annual rates of 12.7% and 13.3% per year, respectively. Analysts forecast that the company's EPS will rise at an average rate of nearly 11% per year for the next five years. This bodes well for future dividend hikes. The company has a price-earnings ratio (P/E) of 19.2 times its trailing earnings, which is a premium to Praxair's peer group on average but slightly below the company's five-year average ratio. The stock appears pricey relative to its industry based on other valuation metrics, such as the price-to-book value ratio and price-to-sales ratio.

Industrial Gases Stocks: Dividend Yields Graph
Air Products & Chemicals (NYSE: APD) offers a higher dividend yield of 3.2% on a payout ratio of 46%. In fact, APD has the highest dividend yield of the featured stocks and is known as a dividend aristocrat, a stock that has paid dividends for at least 25 consecutive years. In APD's case, the company has paid dividends since 1954 and has raised them for 30 years in a row. This $18-billion producer of atmospheric and process gases also has a large chemicals component, which makes it a more diversified industrial play. It is also the world's largest producer and supplier of liquid and gaseous helium. Given the dwindling supplies of helium and the favorable price dynamics, the stock stands to benefit from the rising demand meeting limited supplies of the gas. Over the past five years, the company's EPS and dividends grew at average rates of more than 11% per year. Given that APD's EPS is expected to expand at an average rate of 9.1% per year for the next five years, further dividend increases could be expected in the future. The stock is less pricey than Praxair's, as its P/E of 15.1 is below its respective industry ratio of 16.5.

Airgas (NYSE: ARG) is also an industrial gas stock. It pays a dividend yield of 2.0%. Its payout ratio is low at 38%. Despite its comparably lower yield, Airgas has been an attractive dividend growth stock. Over the past 10 years, Airgas has increased its dividend 12 times. Its dividend hikes averaged 21% over the same period. This year, the company boosted its dividend by an even higher 25% rate. Over the past five years, however, dividend growth averaged a spectacular 35% per year. In terms of valuation, the stock is more expensive than its respective industry on average, as the stock's P/E hovers around 19.3, while the industry's stands at 16.5. The Airgas stock currently has a price-to-book ratio above that for the industry on average. The stock is up 34% over the past 12 months.

L'Air Liquide (PAR: AI.F)(OTCBB: AIQUY) is a $40-billion, France-based atmospheric, process, and medical gases producer. By market cap, it is the world's largest industrial gases company. It pays a dividend yield of 2.3% on a payout ratio of 46%. The company's EPS grew, on average, at a rate of 9% per year over the past five years. Dividend per share growth has been in-line with the industry average relative to its peers. On a P/E basis, the stock is trading at a slight premium to its industry; however, its P/E is on par with the stock's average ratio for the past five years. The stock is up 24% over the past year.

The Linde Group (XET: LIN.DE)(OTCBB: LNEGY) is the world's second largest industrial gases producer. This company with a market cap of $32 billion sells compressed and liquefied gases, as well as chemicals for various industries. Its gases are used in the energy sector, steel industry, chemical processing, glass production and electronics, environmental protection, and food processing. The company has been in existence since 1879. It currently pays a dividend yield of 1.9% on a low payout ratio of 36%. Over the past year, the company's EPS and dividends grew at rates of 16.40% and 13.64%, respectively. Based on a five-year annualized metrics, The Linde Group's dividend growth ranked among the highest relative to its industry peers. Currently, the stock has a P/E of 18.7, above the industry average, but below the stock's five-year average ratio. Unlike most of its peers, based on a price-to-book ratio, the stock is valued below its respective industry.

These five companies control some 75% of the overall market for industrial gases. The expected boost from the cyclical rebound and the future growth based on the expansion of gas uses in new technologies bode well for a continued strong performance of these dividend plays.


Stock name Dividend Yield
Air Products & Chemicals 2.72
Praxair 2.56
Air Liquide 2.35
Linde 2.30
Linde 0.00

Articles featuring Air Products & Chemicals (APD):

Stock Spin-Offs With No Yield

Almost three years ago I wrote a post titled, "Why I Love Stock Spin Offs." I essentially discussed the typical "unlocked" values stock spin-offs can provide for both the parent and offspring stock once the separation occurred. In general, many stock spin-offs do offer great value and benefits to shareholders, as the newly separated businesses can better focus on their core business or sector more efficiently. Many conglomerates operate businesses in various sectors, and... Read more

The Most Undervalued And Overvalued Dividend Champions - March 2016

In June of 2015, I started a series of articles in which I highlight the stocks from the Dividend Champions list that have the highest and the lowest Percent Above Average Yield (PAAY) over the past year and over the past five years. PAAY is a measure of how much a stock is above (high PAAY, undervalued) or below (low PAAY, overvalued) its usual yield, and can be an indication that the stock is mispriced. I've been busy the last few months with life getting in the way of me doing these... Read more

Dividend Income Update: February 2017

It's dividend income update time. One of my favorite times of the month as I get to review my previous month of passive income received from my dividend income portfolios. Without rehashing the wild ride we experienced in the market so far this year, I could find comfort in one thing, my dividends. As we all know, the market may move up and down irrationally and seemingly on a whim while our dividends remain much more stable, reliable and predictable. Sure, dividends may not increase... Read more

Can 20 Financial Ratios Be Used To Find Dividend Growth Companies That Outperform The Market?

INTRODUCTION As do-it-yourself investors, we all seek to pick the right companies to ensure a better financial future. I had attempted to use 20 financial ratios to measure a company's moat. This exercise has not proven to have had the immediate results I had hoped for. But from this effort, SA member Fernando Soriano made the comment in one of my articles that when he back tested the top scoring stocks using my moat rating system, he found that they had outperformed the market. I am... Read more

'Safe' Champion Dogs Equal Dow Dogs' Dividend Price And Overbought Bloat

The Dividend Dogs Rule The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest-yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called, "underdogs." January Champion Dogs David Fish's Dividend Champions Index members listed as of 1/31/17 were... Read more