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Readers hoping to buy Air Products and Chemicals, Inc. (NYSE:APD) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Air Products and Chemicals' shares before the 30th of September in order to receive the dividend, which the company will pay on the 8th of November.
The company's next dividend payment will be US$1.50 per share. Last year, in total, the company distributed US$6.00 to shareholders. Looking at the last 12 months of distributions, Air Products and Chemicals has a trailing yield of approximately 2.3% on its current stock price of $259.56. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Air Products and Chemicals is paying out an acceptable 64% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 84% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's positive to see that Air Products and Chemicals's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Air Products and Chemicals's earnings per share have risen 15% per annum over the last five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. We're surprised that management has not elected to reinvest more in the business to accelerate growth further.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Air Products and Chemicals has lifted its dividend by approximately 12% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Air Products and Chemicals worth buying for its dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that Air Products and Chemicals is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. All things considered, we are not particularly enthused about Air Products and Chemicals from a dividend perspective.
On that note, you'll want to research what risks Air Products and Chemicals is facing. Every company has risks, and we've spotted 1 warning sign for Air Products and Chemicals you should know about.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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