Is Air Products a Buy?

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Basic-materials companies with operations engaged in commodities provide the resources needed to build and maintain our society. Since these materials go into everything from homes to automobiles, the underlying stocks are tied to the health of the global economy -- for better or for worse.

It probably goes without saying that over the past five years, companies in the basic materials industry have seen extremely volatile financial results as the global economy churned through the financial crisis.

One stock that gets high marks from much of the investing community is Air Products & Chemicals (NYSE: APD) for its reliable business results and tremendous record of dividend increases. It hasn’t rallied to the extent of the broader market over the past few years. As a result, is the stock a buy?

Breathe easier with Air Products

Many companies engaged in basic materials are under pressure, as a result of continued sluggish global demand. For example, aluminum giant and Dow Jones Industrial Average component Alcoa (NYSE: AA) has had its share of struggles in the wake of the 2008 recession.

As the financial crisis set in, global demand for aluminum quickly dried up. Since Alcoa is tied so closely to the health of the global economy, the recession took a huge bite out of its business -- a setback from which the company is still recovering.

2012 itself was a tough year for Alcoa. Sales fell 5% year over year, although 2012 was a year of difficult comparisons from 2011’s better results.

Meanwhile, Air Products and Chemicals has performed admirably in the years since the Great Recession ensued. Air Products’ sales were flat in 2012 versus the prior year, but are up 22% since 2009.

Diluted earnings per common share clocked in at $5.44 in fiscal 2012, and the company has shown resilience to start 2013. Sales and diluted earnings per share are up 8% and 5.5%, respectively, through the first six months of the year.

Better than its competitors

Airgas, Inc. (NYSE: ARG) competes with Air Products but hasn’t performed quite as well in digging itself out of the hole caused by the recession. Airgas recently released its annual report which showed that sales increased 4% year over year, with diluted earnings per share growing nearly 9%. Airgas’s cost cuts have helped profitability, but it’s worth noting the company’s sales are up only 13% since 2009.

Moreover, Airgas’s current valuation makes it less attractive than Air Products. Airgas trades for 23 times trailing earnings, whereas Air Products exchanges hands for 17 times earnings. Air Products holds a valuation much more in-line with where the broader market trades. The S&P 500 Index also trades for roughly 17 times trailing earnings.

In addition, Air Products has a dividend track record that is hard to beat. The company recently raised its dividend by 11%, representing the 31st consecutive year of a dividend increase. The new annual dividend of $2.84 per share amounts to a nearly 3% yield at recent prices.

On the other hand, Airgas pays a miniscule dividend of just 1.9% and Alcoa’s dividend troubles are well-known to many. Alcoa cut its shareholder payout by more than 80% during the recession and hasn’t raised it since. At current prices, Alcoa yields just 1.4%.

The Foolish takeaway

Air Products provides reliable annual dividend increases in the high-single digit to low-double digit percentages. Over the past five years, the company has increased its shareholder payout by 10% compounded annually. It seems that year in and year out, no matter how challenging the prevailing economic climate, Air Products comes through with a 10% dividend increase.

Airgas is a profitable company that does pay a dividend, but its yield is 100 basis points lower than what you can secure with Air Products. Moreover, Airgas is more richly valued than Air Products, meaning new investors are getting a thinner margin of safety.

Because Air Products is so committed to maintaining its streak of dividend increases and trades reasonably as compared to where the market trades, I’d consider Air Products a buy, and you should consider any pull back as a solid buying opportunity.

Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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