Air Products and Chemicals (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has paid distributions since 1954 and increased dividends on its common stock for 30 years in a row.

The company’s last dividend increase was in March 2012 when the Board of Directors approved a 10.30% increase to 64 cents/share. The company’s largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.10% to its shareholders.

The company has managed to deliver 10% in annual EPS growth since 2002. Analysts expect Air Products and Chemicals to earn $5.57 per share in 2012 and $6.35 per share in 2013. In comparison Air Products and Chemicals earned $5.59/share in 2011.

Air Products and Chemicals is expected to post a 5% growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia. In addition, new business initiatives such as its Tonnage Gases Business will lead to 10 – 15% increases in EPS by 2013.

While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically.

The return on equity has increased from 16% in 2002 to 22% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.70% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven years on average.

The dividend payout ratio remained at or below 40% over the past decade, with the exception of two brief spikes in 2003 and 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Air Products and Chemicals is attractively valued at 14 times earnings, yields 3.20% and has an adequately covered dividend. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long APD

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How long does it take to manage a dividend portfolio?

One of the most important goals that I try to achieve in my dividend growth portfolio include stock quality, valuation and diversification. I have written extensively on diversification before, and why it is an important stepping stone in structuring your dividend portfolio. I believe that even if one has an investing edge through a strategy such as dividend growth investing, investors need to have fail safe mechanisms such as diversifying among at least 30 quality stocks, while paying a reasonable price for them. Thus, if investors end up purchasing the next Bank of America (BAC), the blow to their portfolio and dividend income would not be sizeable enough that they would have to go back to work at an old age.

In each of my articles on diversification however, there are always readers who express concerns about the amount of time it would take to keep current on all events in a 30+ stock portfolio. This is a valid concern, since it could potentially take more effort to act on a news of a dividend cut in a 30 stock portfolio than a 10 stock portfolio. I do believe however, that the added safety of spreading your risk between 30 or more income stocks is well worth the effort it would take to disseminate new information regarding one of your holdings. So how can dividend investors achieve adequate portfolio diversification, while also having a life?

In my stock picking, I use quantitative and qualitative screening criteria. In general, it takes 15- 20 hours on average to thoroughly analyze a dividend growth stock that fits my entry criteria. This could include reading annual reports, analyst reports, any notable news articles, looking at trends in dividends, earnings, stock prices, sales and familiarizing yourself with the company in general. In a portfolio of 30 stocks, this translates to several hundred hours of research and analysis. The good part about this is that once an understanding of a company’s business is done, there is typically very little work involved in learning new information about it. Typically, a company like McDonald’s (MCD) or Wal-Mart (WMT) is not going to change their business model every year. As a result, an investor who understands the business of each of these corporations today, will likely still have a good understanding of these businesses 10 years from now.

In addition, some investors already have a circle of competence in certain income stocks. This could be due to work they might have already done in researching these companies due to their occupation, through previous interactions or due to their accumulated level of knowledge in general. As a result, it might take them much less than 15 hours to analyze a stock, given the level of experience they have accumulated. For example, I have experience in the telecom industry, which lets me analyze a company like AT&T (T) much faster than analyzing a stock in the apparel industry such as V.F. Corp (VFC).

After the initial analysis has been achieved, investors who focus only on the important events surrounding the companies on their list, will not spend too much time on each individual investment. It is important however to spend approximately ten hours each week in researching new candidates for your income portfolio, screening the market for attractive opportunities and looking for important developments in the companies you own. Chances are that there is less than one important development per year per each stock on your list. In addition, certain events outside of your analysis framework could provide you with additional information. For example, everyone who paid any attention to news in 2007 – 2008 heard about the financial crisis affecting the banks. Thus, any bank stock investor should have known to look after their financial stocks with a more detailed lense.

Another positive of analyzing companies with strong competitive advantages is that there are few major developments that happen. I choose to ignore the daily market noise, and try to focus on important things such as acquisitions, dividend announcements and earnings releases. Because of this, once the investor has accumulated a comfortable level of knowledge about a company, it can mostly still be relevant 5 – 10 years from now. It could allow the investor to accumulate a good amount of knowledge on the 100 or so dividend champions or on most of the 300 dividend achievers out there, during the span of their investing career. Remember that a portfolio of 30 individual stocks takes a few years to build. Similarly, your knowledge of the dividend growth stocks of our day will take time to accumulate. As you gain experience, you will be more efficient in analyzing companies from different industries much faster.

My weekly routine includes compiling a list of dividend increases for the week, which I typically post on my site on Mondays. I also screen the market for companies which are attractively priced, given the fact that I still add money to my portfolio every month. In addition, I also try to update my knowledge of companies I have already analyzed thoroughly by compiling a weekly analysis or two. In the meantime, I have set up a portfolio at Yahoo! Finance, which allows me to scan the market for headlines related to the companies I am interested in. Most companies would typically post their annual reports in February or March, which is when they would be sending those documents to me. All of this takes me 10 - 15 hours per week.

Of course, by intimately understanding the investments I am making, I feel in charge of my own retirement destiny. I would much rather spend the time I spend on my investments, than pay 0.5% annually of my net worth to an investment adviser, while I feel clueless about my financial situation. I also enjoy expanding my knowledge on investment related subjects, which is the same reason that you are reading this website.

Full Disclosure: Long MCD and WMT

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Seven Stocks Boosting Investor Payouts

One of the primary reasons I hold quality dividend stocks is the regular distributions I receive in my brokerage account. In fact, as part of my retirement plan, I expect to be able to achieve financial independence in a few years, when my dividend income exceeds my expenses. After this dividend crossover point I would be able to retire and not worry about having a demanding eight to five job. I particularly like dividend growth stocks, since they regularly boost distributions, which enables my passive income to maintain purchasing power over time.

Several consistent dividend growth payers approved hikes in their distributions to shareholders last week. The companies include:

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company raised its quarterly dividend by 7.20% to 26 cents/share. This marked the 35th consecutive annual dividend increase for this dividend champion. Yield: 2.70% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company raised its quarterly dividend by 22.20% to 27.50 cents/share. This marked the 37th consecutive annual dividend increase for this dividend champion. Yield: 3.80% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. This REIT raised monthly distributions to 14.6125 cents/share. This dividend achiever has boosted distributions for 18 years in a row. Yield: 4.30% (analysis)

Best Buy Co.(BBY), Inc. operates as a retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. The company raised its quarterly dividend by 6.25% to 17 cents/share. This marked the tenth consecutive annual dividend increase for Best Buy. Yield: 3.50%

Dynex Capital, Inc. (DX), together with its subsidiaries, operates as a real estate investment trust or REIT in the United States. The company raised its quarterly dividend by 3.60% to 29 cents/share. This marked the second dividend increase over the past year. Dynex Capital has raised distributions for 5 years in a row. Yield: 11.60%

John Wiley & Sons, Inc. (JW-A) provides content and workflow solutions in areas, such as research, professional development, and education. The company raised its quarterly dividend by 20% to 24 cents/share. This marked 19th consecutive annual dividend increase for this dividend achiever. Yield: 2%

Oil-Dri Corporation of America (ODC) engages in the development, manufacture, and marketing of sorbent products in the United States and internationally. The company raised its quarterly dividend by 5.90% to 18 cents/share. This marked 10th consecutive annual dividend increase for this dividend achiever. Yield: 3.60%

Full Disclosure: Long MDT, WAG, O

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National Bankshares (NKSH) Dividend Stock Analysis

National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg, which provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments in Virginia. This dividend achiever has increased dividends on its common stock for 12 years in a row.

The company’s last dividend increase was in May 2012 when the Board of Directors approved a 16.70% increase to 53 cents/share.I uncovered this hidden dividend star in my weekly review of dividend increases.

Over the past decade this dividend growth stock has delivered an annualized total return of 12.30% to its shareholders.

The company has managed to deliver 6.60% in annual EPS growth since 2002. Analysts expect National Bankshares to earn $2.56 per share in 2012 and $2.49 per share in 2013. In comparison National Bankshares earned $2.54/share in 2011.

The bank has managed to maintain a high net interest margin of 4.00% – 4.80% since 2002. This period included an increase in Fed Funds rate from 2003 – 2007 followed by a decrease in Fed Funds rate from 2008 – 2009. Net interest margin is the difference between what the bank lends capital at, minus the cost of that capital. As interest rates are expected to remain low until 2014, the company’s cost of capital should be low. The level of profitability is especially noteworthy during current difficult economic environment. The bank is very conservatively run, which has resulted in a very low amount of non-performing assets of 1%. In addition, it has a solid balance sheet, with a tangible common equity of 12.50%, vs 7.50% for peers.

This conservatively run bank would likely not be found on most investor’s radars.The Dodd-Frank act will likely have an impact on it, as it will have to increase overhead to comply with act and also face limitations on certain fees it can charge its customers. Another factor that would limit income growth is decrease in interest rates on the investment securities the bank owns in its investment portfolio, which account for approximately 33% of total assets.

Only 27% of the company’s stock is held by institutions. This means that investors would not be competing with mutual funds for this stock. When few institutional investors are following a stock, there is an opportunity to uncover a good company and purchase it at a bargain price.

The return on equity has been declining since hitting a high of 15% in 2003, although it has been stabilizing since 2007 - 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 8.20% per year over the past decade, which is higher than to the growth in EPS. The company pays semi-annual distributions to its shareholders.

An 8% growth in distributions translates into the dividend payment doubling every nine years. The current semi-annual payment is twice the amount of dividends paid 9 years ago.

Between 2002 and 2004 the dividend payout ratio increased from 34% to 40%. Since 2005 however, this indicator has been flat around 40%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, National Bankshares is attractively valued at 11.50 times earnings, yields 3.50% and has an adequately covered dividend. I would consider initiating a position in the stock subject to availability of funds.

Full Disclosure: None

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Dividend Investors – Do not forget about total returns

Dividend investors often get into the strategy because the dividend component of total return is more stable. This makes it an ideal strategy for retirees to live off dividends and not be dependent on short term market fluctuations.

Some dividend investors however focus exclusively on yield, which could result in sub-par performance. Choosing a utility yielding 5%-6% today with a high payout ratio and low or no earnings and dividend growth over a dividend growth stock such as Johnson & Johnson (JNJ) might lead investors disappointed down the road. Even if retirees are looking for high dividend stocks for current income, they should not ignore the fact that they would likely remain retired for two or three decades. A stock yielding 6-8% today that does not grow distributions would deliver the same amount each year. The purchasing power of these dollars would be much lower however. In fact even a 3% inflation would decrease purchasing power by 50% over 24 years. This means that a Coca Cola can selling for 75 cents today would likely cost $1.50 in 24 years. On the other hand, a company which yields 3% today, but grows distributions at 6% would pay a yield on cost of 12% in 24 years. Even if the purchasing power is cut in half by inflation, this is still a respectable inflation adjusted yield on cost of 6%.

Utilities are dividend staples, which investors usually purchase in their search for current income. Utilities typically provide above average yields, although their dividend payments do not grow much over time. As a result the purchasing power of these high yields decreases each year. Most of these utilities also pay most of their earnings out in the form of dividends. This means that if these companies could easily cut distributions if cost of capital increases or regulators are not willing to increase rates to provide for sufficient return on new investment. If this happens, investors would suddenly realize a much lower yield on cost on their original investment which would also have much lower purchasing power. Of the 15 companies included in the Dow Jones Utilities index, only a handful have not had dividend cuts over the past 2 – 3 decades.

It is evident, that utility dividends are highly cyclical. In essence, the best time to purchase utility stocks might be right after a dividend cut.

Investors should focus on total returns as well, because increases in share prices would protect the purchasing power of the principal over time. By focusing solely on obtaining the highest current yield, investors could actually risk depleting their principal and suffering from dividend cuts at the worst times imaginable.

The types of companies which are suitable for all investors, no matter what their age, are dividend growth stocks. The types of companies investors should look for include:

The Procter & Gamble Company, together with its subsidiaries, provides consumer packaged goods and improves the lives of consumers worldwide. The company operates through six segments: Beauty, Grooming, Health Care, Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. The company has raised dividends for 56 years in a row, and has managed to boost them by 10.90%/year over the past decade. Yield: 3.60% (analysis)

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has raised dividends for 50 years in a row, and has managed to boost them by 10.10%/year over the past decade. Yield: 2.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company has raised dividends for 35 years in a row, and has managed to boost them by 27.40%/year over the past decade. Yield: 3.10% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The company has raised dividends for 25 years in a row, and has managed to boost them by 8.80%/year over the past decade. Yield: 3.50% (analysis)

Philip Morris International Inc (PM)., through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised dividends since 2008, and has managed to boost them each year since. Yield: 3.50% (analysis)

Full Disclosure: Long ED, KO, PG, MCD, PM ,CVX

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