Recent Buy

buyNot a lot of value in the market currently, but I’m still doing what I do best: buying ownership stakes in the highest quality companies I possibly can. Not overpaying, even for very high quality, is extremely important, but the broader market continues to rally and leaves little opportunity to get a real steal on great individual assets. I refrain from valuing the market as a whole, and prefer to remember that the stock market is just a marketplace to buy and sell ownership positions in individual companies, and as such they are priced individually.

However, when the broader market is performing as well as it has (the S&P is up 8.91% YTD) a lot of individual companies are going to rise in valuation as well. A rising tide lifts all boats. Unfortunately, I prefer a drought. But, not all is lost. I keep me eye on the long-term and remember that the me of 10 years from now will be glad that the me of today is living below my means and spending my saved/excess capital on appreciating assets via dividend growth stocks that will likely be much higher priced in this future scenario.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 20 shares of Air Products & Chemicals, Inc. (APD) on 4/2/13 for $85.46 per share.

I’m extremely excited about this purchase. This diversifies my portfolio, as this is my first holding in the basic materials sector. But that really matters little to me. What really excites me is how high quality this company is and how successful it’s been over such a long period of time.

APD is one of the world’s largest suppliers of hydrogen and helium, while also having operations in semiconductor materials, refinery hydrogen, natural gas liquefaction, advanced coatings as well as adhesives. They operate in over 40 countries and generate 60% of revenues outside the U.S.

They grew EPS from $1.79 in 2003 to $4.66 in 2012. That’s a CAGR of 11.22% over that period. EPS growth has been a bit weaker over the last few years due to a global economic slowdown, however. APD is an industrial atmospheric gas supplier, and if the industrial space slows down APD will suffer. I do believe that the global economy, and manufacturing, will pick up over the long haul and APD is positioned well to pick up some of the business in that growth with an investment in the world’s largest hydrogen pipeline network along the U.S. Gulf Coast and key contracts in China and Latin America. While revenue has been rather stagnant over the last few years, APD remains committed to shareholder returns via dividend raises.

The entry yield on my purchase is 3.32%, which is obviously quite attractive in this low interest rate environment. The 10-year dividend growth rate for APD is 11.8% (similar to the EPS growth rate). I’ll take a 3%+ entry yield backed by a 10% DGR any day of the week on a high quality business. APD has 32 years of dividend growth behind it. The most recent dividend raise was a full 10.9%, as APD shares now pay out $0.71 per share quarterly over the old rate of $0.64 per share quarterly. The dividend is also well covered, with a 57% payout ratio. The balance sheet is moderate, with a debt/equity ratio of 0.7. The one area of concern for me is the FCF, as rising capital expenditures has hurt FCF with relatively static operating cash flow. I am anticipating management clearly executing growth plans on a global scale.

This purchase adds $56.80 to my annual dividend total. Overall, I’m happy with my investment. APD is a global industrial business with a strong dividend growth story and committed to rewarding shareholders. Currently rating with a P/E of 17.3, it’s not a steal. But, as I mentioned above there are few steals to be had right now. Using a DDM with a 10% discount rate and a conservative 7% long-term DGR the intrinsic value falls just over $100 per share. Obviously changing these numbers slightly gives you a much different number, but I think an argument could be made that the current price is at least fairly valued, and perhaps a small margin of safety might even exist.

This purchase adds a strong, global company in a sector I haven’t been previously exposed to. I’ll be a happy shareholder while continuing to monitor the FCF. I still have enough capital for at least two more purchases along a similar scale as this one, so I’ll be actively monitoring for attractive long-term equity ownership opportunities.

I currently have 31 positions in my portfolio, as this was a new addition.

Some current analyst opinions on my recent purchase:

*Morningstar rates APD as a 3/5 valuation with a FV estimate of $92.00.
*S&P rates APD as a 2/5 star Sell with a FV calculation of $82.40.

I’ll update my Freedom Fund in early May to reflect my recent addition.

Full Disclosure: Long APD

What are you buying?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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34 Comments

  1. Very good. Massively eyeing APD as well. It is high up on my priority list. The dividend raise and the recent “bad news” (I think Airgas foretold weaker industrial gas earnings or something) made for a nice buying opportunity.

    I’m slightly considering buying some RDS/B now too. I don’t know…The yield is nice, lack of growth recently not so…

  2. DM, I like APD and have it as another purchase candidate into my account. It really is a great company and dividend payer.
    Also I am happy I finally could comment as one of the first commenter, hehe, many times I came to your blog and there already was 40 comments… this time I am almost the first one!!!! whoohiii

  3. DM,

    I like APD a lot and there should still be plenty of dividend growth ahead. I’m a little worried about the FCF but I feel they can manage it until better times come. Nice buy! Especially since I purchased almost the same amount for almost the same price on the same day.

  4. I also have some APD. I only have about 14 shares. At the time I was putting $1000 worth into each of the Dividend Aristocrats. I also have a whopping 12 shares of MMM. So for now I am not buying any new stocks, but trying to get the numbers of shares of each company I own up to at least 50.

    So I will be buying some more APD soon. A lot of the stocks I own have P/E ratios above 20. So I will be waiting a while on some of them.

  5. I just picked up BHP Billiton (BBL-N), which had been #1 on my watch list for quite some time. It ranked ahead of many US stocks for me due to withholding tax reasons, which I don’t pay on BBL.

    With that purchase made, the two stocks I have turned my attention to are APD and CAT. Both have grown their dividends over time, but APD is a little less cyclical and its entry yield is almost 1% higher than CAT, so at this point I am leaning to that as my next US purchase.

    I don’t want to add to the number of foreign stocks I hold, so if I buy APD or CAT I will have to sell a current foreign holding (likely Novartis, which has had a great run but I am not thrilled with recent dividend increases).

    Having to sell a stock to buy one forces me to be patient, but if I can get APD around $80 that may be enough to prompt a move. Looking at a similar entry price for CAT. Neither has touched $80 for about 6 months, so I may be waiting awhile.

  6. RO,

    Thanks for stopping by! I hope all is well for you. Always good to hear from you. Still waiting on that blog of yours… 🙂

    The recent dividend raise and subsequent weakness in share price led to the yield being rather high for this stock. It doesn’t often trade for a 3.3%+ yield.

    I’ve looked at RDS.B and the lack of dividend growth just keeps me away. I sold TOT a while back, and I look at RDS as just a bigger version of that. I do regret selling XOM a while back, but I’d be sticking with COP if you want the high yield. Not completely integrated, but they are focusing on some high quality domestic assets. I’ve also been looking at OXY in this space. CVX is still my favorite integrated major.

    Keep in touch!

    Best wishes.

  7. Martin,

    Hey, glad you were able to come on and be an early commenter! 🙂

    I’ve tried a few times to go on your blog and comment, but I keep getting error messages like the site has malware or something?

    I hope to have you as a future fellow shareholder in APD!

    Best regards.

  8. Pursuit,

    I noticed that! We both seemed to grab APD at a very similar price. I guess great minds think alike. It was one of my top candidates when I recently published “What Are You Buying?”, and the price went down slightly from there so I decided to pull the trigger.

    Hope you’re having a great weekend!

    Take care.

  9. EF,

    I hear you on the valuations right now. A lot of the secular plays I prefer in the consumer space are very expensive right now. I’m instead focusing on finance, basic materials, tech and certain industrial plays instead. I think there is more value there vs. consumer defensive and utilities right now.

    Best wishes!

  10. Michael,

    Nice buy there! I think you got in at a very attractive price. APD has a very nice entry yield right now, backed by a long history of robust dividend growth. I think their business will continue to thrive over the long haul, while being punctuated with periods of slower growth like they’re in right now.

    Great to have you as a fellow shareholder!

    Best regards.

  11. Dining on Dividends,

    I’ve looked at BBL a few times. I certainly like a lot of the fundamentals, and that would be further diversification in the basic materials sector…but the underlying business is heavily cyclical. That concerns me a bit, as I try to focus on more secular growth stories. Also, I don’t know how much pricing power they really have? They’re rather subject to the prevailing pricing scheme of the commodities they sell, no? At any rate, I do like the yield, and the recent dividend growth is very nice. As you mention, the lack of foreign tax withholding is very nice.

    I’d also like CAT around $80. NVS has been a bit disappointing recently, but still a great company.

    Best Wishes!

  12. Outstanding, DM, outstanding! I’ve been eyeing APD for years now and I haven’t pulled the trigger on it because it has often traded at a premium. Sometimes it’s difficult to remember about these dividend gems, thanks for writing about it. I’m gonna be loading up on APD soon to complement my current Basic Materials position, NUE.

  13. It is not a malware. I have a stock quotes ticker running on the top and it is made with Java and your browser security settings is too high and thus blocking it and possibly asking you if you want it running. So no worries, no viruses or errors. I think I will disable it and look for a different options than Java applet. What’s the use of it when it is blocked. Right?

  14. Spoonman,

    Thanks for stopping by. Enjoying reading about your journey to ERE/FI.

    I’ve looked at NUE in the past. Solid company, but the growth wasn’t what I was looking for. APD isn’t perfect, with FCF being lower than what I’d like…but it seems like a solid company in this space.

    I hope all is well and I look forward to continuing following your path!

    Best wishes.

  15. Martin,

    I’m sorry about that. I wasn’t trying to suggest that your site had viruses or anything. I probably should have worded that differently. It was just that my avast software would go crazy whenever I visited your site.

    I just popped on and no more alarm bells! 🙂

    I’ll be stopping by more often.

    Best wishes!

  16. Looks like a good buy to me, I pulled the trigger on 50 shares @85.03 right before the close yesterday. I’ve had it on the radar for a while, and I wish I could have gotten in earlier in the day, when it was nearer to the intra-day low, but this will be perfectly fine.

  17. APD is one of the rare attractively valued stocks with very good dividend growth in this market. I wish I had more money to invest, otherwise I would add to it.

    I replaced XOM with COP in 2012. However, the issue with COP is they are selling off assets, and I am not sure where future growth is coming. Their reserve replacement ratio is one of the lowest among peers too. Not to worry about it, but just have something in mind. Nevertheless, I thought XOM was not as good as COP though. RDS.B – it is decent, although the lack of DG makes me look at it more closely.

  18. Great buy! I had looked at APD before but they popped up on my latest screen with the increased dividend so I pulled the trigger on Tuesday. I bought a small position just a little less than you paid and they are also my only materials play currently. I looked at BBL but they seem to be a price taker instead of maker.

    There aren’t many bargains in this market so I don’t mind paying fair value for great companies. I look forward to seeing where you deploy the rest of that cash. Top of my list right now are CAT, APD, WFC, and TD.

    Take care!

  19. Good job for your pick DM. I can’t say something about APD since I only buy TSX stocks for now (US ones will be the next year), I’m a Canuck 🙂

    I bought two Canadian companies, since the TSX bubble deflated a bit these days, one small cap in satellite-based internet access with 4.49% yield and good Q4, and one more risky in the 9% range in the cities development. I also cashed in a good return on a stock to have some cash for future dips and continue to raise the revenues.

    Finally an active month 🙂

    Keep it up in the Freedom way DM! Cheers!

  20. AAI,

    Thanks! I see we both purchased APD around the same time and right around the same price as well. I think the recent dividend raise and subsequent mild drop in share price means APD started popping up on some screens.

    I hear you on BBL. There’s a lot of things I like about that company, but other than oil/energy I try to stay away from direct commodity ownership. Commodities are highly cyclical, and BBL will have no choice but to see profits rise and fall as a result of demand of the underlying commodities they go out and dig up. I think BBL is probably one of the better choices for a basic materials/commodity play, however. The yield is very nice, the dividend growth is highly favorable and they are a global company. It remains on my watch list, especially after the recent pullback in share prices.

    I like your watch list there. All those remain high for me, and the banks especially are looking appealing to me.

    Best regards!

  21. JF Baconnet,

    Nice! Sounds like you’ve been very active. I hope the moves you’ve made to make your portfolio stronger will serve you well over the long haul.

    It’s nice to have cash right now with assets around the world being priced at premiums. Who knows what the future will bring, but it’s always nice to be prepared either way.

    Best wishes.

  22. Aspenhawk,

    I’ve heard a lot of chatter about Japanese stocks recently. Their market is finally on an uptick after many years of soft demand and static valuations. A lot of investors are excited about that market. It’s not something I know a lot about, so I continue to focus on what I know best.

    I like your picks in AFL and XOM. I highly regret selling XOM a while back. Going forward, I will look to sell even less than I already have (which has been minimal). AFL is one of my better ideas right now, but I’m already heavily allocated to it.

    Take care!

  23. DGI,

    I agree with you. On the valuation front, I think APD looks good here. Like I said in the article, I think it’s at least fairly valued. I do rather think a case could be made that a 10% margin of safety is present, meaning the fair value is somewhere above $90. I do hope, however, the free cash flow situation improves. Everything else looks good.

    I’m with you on the oil companies. I think COP looks good here, even though they’ve been selling off assets. It’s wise to sell off underperforming assets when oil prices are high to reinvest that capital into new ventures to replace reserves going forward. I like the fact that COP is starting to really focus on what they feel will be the best performing assets, rather than just trying to drill anywhere and everywhere. This rather focused approach can also be risky if the assets don’t pan out as predicted.

    RDS.B is a tough call for me. The yield is very nice, and certainly I like the big oil majors. The low dividend growth, however, just keeps me away right now. Even a 5% growth would be nice, if they can demonstrate that for a few years.

    Best wishes!

  24. Aspenhawk,

    I just took a very quick look at these stocks.

    Am I correct in that DoCoMo is the wireless business of NTT? If so, DCM would definitely be the equity position I’d prefer. Both do look cheap, but I could see the growth with DCM being much better going forward.

    The issue I would have with any Japanese stocks is the economy there, and the aging demographic. Also, you’re landlocked. I’m no expert on Japanese macroeconomics to be sure, but I’ve read various studies and reports that the young demographic of Japanese are concerned about working and not having children. If so, that could spell trouble on the consumer front. Something to consider.

    Best wishes!

  25. Aspenhawk,

    I should have noted that AFL is a a Japanese stock in disguise, but it is diversified with the U.S. business. It’s much easier for AFL to geographically diversify than, say, a telecom due to the asset-heavy nature of those businesses.

    Best regards.

  26. Nice choice Dm. I don’t know what to buy. APD comes third on my list after AFL and XOM. I intend to buy some Japanese stocks with or without dividends, the like: DCM,IX,NTT,IIJI. Just bought 2 days ago some TEO. May Christina Kirchner let me breathe in peace and not do the same as with Repsol. Good to you.

  27. I really like APD. I bought some a while ago. Then I bought a little bit more. It keeps coming up on my screens, but I think I think I’ve purchased enough at this point. I’d really like to find another good materials stock to start moving into.

  28. Sincerely I am not excited about the Japanese Market but all I know is that it is at 0,80 to their GDP and as Warren said: you should do very well when the market is at 0,80 or lower. By the way, DCM yields 4,9 % wit a Price to Book of 1,12 and a price to cash flow of only 5,4 ROE 8,77% Debt to equity of 0,05, reason why I will try some of these. NTT yields 4,27% abd P/BV of only 0,64. Is it a Win-Win, I don’t know.

  29. MFIJ,

    I see you have a large position with the company already. I definitely wouldn’t mind owning more, but I’m comfortable with where I’m at right now. I’d like to see the FCF situation improve a bit more and then go from there.

    As far as other materials stocks, I also track NUE and BBL.

    Best wishes!

  30. I think for now I’ll bask in the aura of the already wonderful blogs existent, and merely applaud loudly at all of the fantastic analysis out there…I’m merely an involved fan, for now!:)

    Keep up the great work and inspiration!!!

  31. Hey D. Mantra,

    Congrats on a whole lot. Hitting the 100K mark, going national and becoming a celeb AND redesigning the site. Wow! If you want to increase your income, you might now be able to start doing autograph signings (for a fee of course). HA! Seriously, congrats on your accomplishments (definitely things to be proud of). Also, like the new look of the site.

    Anyhow, like alot of your recent buys as well. I was looking hard at APD but ultimately choose MSFT but it was close. I’m a bit shy of tech but considered it a reasonable value and tech overall is still a smaller sector in my porfolio compared to most of the others.
    Might still pick up some APD in the future. Also looking at LMT.

    I’m glad you picked up some Canadian banks. Back in 09′, I made a big investment in three banks up North (RY, TD and BNS). Didn’t know much about investing at the time but I thought I saw an opportunity as the market indiscrimately punished them driving their prices down almost as bad as the American banks (even though they were in much better shape). I sold much of my stake in them to collect the cap gains and use them to diversify into other dividend paying stocks but I did keep some of the shares as they themselves were also good divy payers.

    Actually, these stocks illustrate how sometimes relying on absolute criteria can cause an investor to overlook some good stocks. I.E. many of these banks temporarily cut or froze their dividends during the 08-09 financial crisis. Thus, they don’t appear on the dividend champions and contender lists. Yet, once it was clear that the Canadian banks were not in as bad a shape as their counterparts down south, they quickly resumed the divy increases. However, automatically eliminating a stock that does not have a certain number (say, 5 or 10 yrs) of consecutive div increases would eliminate these stocks. Don’t get me wrong. I think the dividend champ/contender lists and sticking to companies w/ divy increase histories is very valuable in investing but I’m just sayin’ that sometimes an investor needs to keep an open mind and look at stocks indivdually as well.

    While we’re on the subject of Canuck stocks, I really appreciated your article on investment opportunities up North. In addition to the banks, I’ve owned some of the Canadian telecos. I’ve had TU but sold it to collect the cap gains. Not sure if that was the right move as I usually don’t do that and am a long term investor. I considered RCI at one point and was close to pulling the trigger but, like you, the debt concerned me. I currently own BCE. Great yield with moderate payout ratio and debt. I don’t think the divy growth will be great going forward but should get some and the yield north of 5 goes a long way.

    Even though I appreciate the investment opportunties up North (besides, I enjoy visiting Canada and appreciate their country, history and culture) I do wish there was some more diversity in Canadian divy investment. It seems that outside of financials and telecos, the choice is somewhat limited. You do have some energy and maybe some utilies but doesn’t seem like too many other ones. If there are and am missing some good opportunties, perhaps someone can let me know.

    Agree with you that consumer and utilities tend to be overvalued now with the greatest opportunites for value in the materials, tech and industrial sectors.

    Congrats again on the first 100K and good luck w/ the next 100.

    -Rock the Casbah

  32. Rock,

    Thanks for stopping by. I always appreciate your thoughts and comments.

    Funny stuff there on the autographs. Hey, if you want an excellent investment opportunity – here’s one: buy my autograph for $50 today, because there’s a slight chance that 10 years from now it might be worth $40. 🙂

    Great discussion there on the Canadian banks. I do not find them at particularly compelling values today, but I still think there is value to be had and I’m more than okay waiting for any potential capital appreciation while I’m paid a 4% yield to wait. Hard to get a yield that high on quality businesses right now in our low rate environment.

    I’ve noticed that the Canadian dividend stocks do typically concentrate in just a few industries, as you point out. This is something that Dividend Ninja has pointed out before. Nothing particularly wrong with that, as you can invest in those industries and companies as a Canadian and seek further diversification in foreign markets like ours here in the U.S.

    I also like BCE. Nice yield and moderate growth to boot.

    Thanks for the well wishes! I do certainly hope the next $100k comes as fast or faster than the first $100k did. I’m just simply blessed to have had so much success so far and the opportunity to give back to the community is a wonderful opportunity. I’m just so glad to be part of a great community that us dividend growth investors have carved out for ourselves. We’re all wonderfully supportive of one another and the mutual education/inspiration is priceless.

    Good luck on your journey, and do please keep in touch. Always enjoy the conversations.

    Best wishes!

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