In times of economic uncertainty, investors are looking for safe places to park their investment dollars and generate growth. Certain sectors such as hospitality, entertainment, and travel have yet to recover from COVID-related effects, but other sectors deemed more or less ‘immune’ to the pandemic have done well.

While some investors may be tempted to wager on more speculative names in hopes of a quick return, I prefer sleep-well-at-night (SWAN) stocks that have durable business models and safe income-generating potential.

A Moat-Worthy Consideration

Air Products (

(Source: Yahoo Finance)

Looking back over a longer period, Air Products has outperformed the S&P 500 by an even wider margin. As seen below, $10K invested in APD back in 1995 with dividend reinvestment would be worth over $167K today, equating a 12% CAGR, which compares favorably against the S&P 500’s 9.1% CAGR and $87K value today.

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(Source: Dividend Channel)

Of course, history does not predict future performance, but I’m also reminded of this statement, which goes: history does not repeat itself but it often rhymes.

As seen above, APD has outperformed the market with relatively low volatility, which suggests to me that the business model is a durable one that has rewarded shareholders well, and will likely continue to do so into the future. In addition, while an extra 3% in CAGR over the general market does not seem much in the short term, it makes a huge difference when compounded over a number of years.

Durable Business Model

Air Products management has stated its goal to be the safest, most diverse and most profitable industrial gas company in the world, all while providing excellent customer service. In addition, I like that management puts a higher focus on growing EPS over growth just for growth’s sake. This is opposed to other companies such as General Electric (GE) and AT&T (T), which have questionable track records of acquiring companies at the wrong time and for the wrong reasons. Plus, a strong advantage for the business is that a large part of its business is conducted on-site with two-thirds in Americas & APJ, and 40% in EMEA, resulting in operational efficiencies and cost savings.

(Source: APD Investor Presentation)

As seen below, the company has a number of projects in its pipeline that are expected to add incremental value to its operations, including the sizeable 11.5 billion Jazan gasification project for oil juggernaut Saudi Aramco (ARMCO), which is expected to close by October of this year.

(Source: APD Investor Presentation)

Management seems especially confident about the profit contribution to come from Jazan, with an expectation of 10% operating margins per investment dollar. In addition, another positive for this project is that it is not dependent on the price of oil, as the process of gasification turns crude into higher value products. The CEO Seifi Ghasemi noted this on the recent conference call:

And you cannot sell it to ships because of IMO 2020. Then you have to gasify. So the gasification is not just coal. Right now the biggest gasification project that we are doing is the $12 billion project in Jazan, that has nothing to do with the coal. It is the gasification of the bottom of the barrel of the refinery. So when we talk about gasification, it’s a combination of all of these things and that’s why we continue to remain optimistic whether oil is $25 or $40 or $60.

Another sign that management is living by its mantra of creating shareholder value can be seen by the significant increases to EBITDA margin since 2014, with it improving from 25% to over 40% today. This tells me that executive management has done an admirable job of strategically allocating capital for the most productive uses for the benefit of shareholders.

(Source: APD Investor Presentation)

Balance Sheet & Dividends

Air Products has the benefit of a fortress balance sheet with $2.2 billion in cash, and just $1.1 billion of Net Debt. Its leverage ratio sits at an impressive 0.3X, implying that it would take less than four months for the company to extinguish its debt if it directed all EBITDA cash flows towards debt pay-down. In addition, the company has plenty of additional liquidity with $2.3 billion on an undrawn credit facility and maintains an A/A2 credit rating from S&P and Moody’s.

The dividend track record is equally impressive with 38 consecutive annual increases, with the most recent 15% bump bringing dividends to $5.36 per share on an annualized basis.

(Source: APD Investor Presentation)

The payout ratio remains safe at just 38% of distributable cash flow, leaving the company with $1.7 billion for opportunistic investments in the latest quarter alone.

Looking forward, the company has seen Asia recover in late March, and larger negative merchant volume impacts in EMEA and Americas are expected in the current quarter. I’m not too concerned about this, as large swaths of the economy are steadily opening up, thereby needing the company’s products to both sustain itself and grow.

Key Risks

Although the company’s products are critical to the functioning of the economy, the business model is nonetheless tied to the health of the economy. As governments around the world have shown a strong appetite for supporting their economies with stimulus measures, I see companies such as Air Products who provide essential products as the key benefactors.

In addition, as the company deals with volatile and combustible compounds, safety is a key risk for the company. What’s encouraging is that safety seems to be a high priority for management as demonstrated by reductions in injury rates over the past several years.

(Source: APD Investor Presentation)

Investor Takeaway

Air Products has had a strong track record of consistent shareholder returns over the past decades, as evidenced by significant margin improvements and a track record of prudent and strategic capital investments. With a number of promising projects coming online, including the Jazan project, I expect revenues and shareholder returns to significantly ramp up. Lastly, a fortress balance sheet and an efficient operating model of primarily on-site sales enable strong shareholder returns, as evidenced by 38 consecutive years of annual dividend increases.

(Source: F.A.S.T. Graphs)

I currently rate Air Products as a Hold solely based on valuation, which, at the current price of $247.86 per share, represents an 18.7 price to operating cash flow ratio. I recommend buying shares on a pullback to the $230 per share range.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.