Not 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’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