Income investing

Air Products (APD): A Reliable Dividend & an Interesting Spin-Off

The Federal Reserve’s move to keep interest rates steady signals that the low-rate environment is likely to persist for some time. With near-record low yields on bonds, many investors are looking towards dividend stocks to power their income portfolios.

Air Products & Chemicals Inc. (NYSE: APD) is a hydrogen and helium supplier that has been in business for over 75 years with 750+ facilities in over 50 countries. In addition to its well-established business, the company has raised its dividend payments for 33 consecutive years with a cash payout ratio of about 69%. The stock currently yields a dividend of about 2.3%, which is significantly higher than fixed income alternatives.

Recently, the company announced plans to spin-off its materials technology business into a new corporation named Versum Materials. The tax-free distribution to APD shareholders of record on the record date is expected to be completed by September of 2016. Without any direct comps, the spin-off is difficult to value, but its operating income growth and margin expansion mean that it’s likely to trade at a premium.

Investors appear to be assigning a premium to Air Products’ stock given these two factors, with a price-earnings ratio of over 23x. In addition, the company faces a number of external risk factors – such as its reliance on key end markets – that make it a riskier bet. However, it’s worth noting that the S&P 500 index as a whole trades at a 25x multiple, which means that the stock isn’t necessarily overvalued on a relative basis compared to most other companies.

Income investors may want to consider averaging into Air Products over the next several quarters. While the stock is a bit overpriced right now, the averaging process could mitigate the risk of overpaying while building exposure over time. Investors would also be building a position in the stock ahead of its spin-off in order to secure shares of Versum Materials in September.

Shares of Air Products & Chemicals Inc. rose 0.81% in early trading on Tuesday, July 26, 2016.