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Two Dividend Stocks On My Buy List

Companies must show a strong dividend triangle and more growth potential going forward. Last month, two companies caught my attention.

As the market constantly evolves, my team at DSR and I are confident in our ability to find incremental stock investment opportunities. Each month, we update our buy list and look for fresh ideas. Those companies must show a strong dividend triangle and more growth potential going forward. Last month, two companies caught my attention.

AIR PRODUCTS & CHEMICALS (APD)

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The Company in a Nutshell

  • APD is the largest supplier of hydrogen and helium in the world. It has several facilities on customer plant sites.
  • It serves multiple customers and various industries. Switching costs are considerable for its customers.
  • While many companies in the basic materials sector are stuck selling commodities, APD sells expertise, stability, and technology.

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Business Model

Air bovada and Chemicals, Inc., is an industrial gases company. The Company provides essential industrial gases, related equipment and applications to customers in various industries, including refining, chemical, metals, electronics, manufacturing, and food and beverage. The Company is also a supplier of liquefied natural gas process technology and equipment. It also develops, engineers, builds, owns and operates industrial gas projects, including gasification projects, carbon capture projects and carbon-free hydrogen projects supporting global transportation and energy transition. The Company operates through five segments: Industrial Gases-Americas, Industrial Gases-Europe, Middle East, and Africa (EMEA), Industrial Gases-Asia, Industrial Gases-Global, and Corporate and other. It operates approximately 836 production and distribution facilities in North and South America, EMEA and Asia.

Latest Quarter Information

What the CEO said:

The committed, dedicated and motivated team at Air bovada  proved once again that they can deliver results now while developing and executing megaprojects for profitable growth in the future. We delivered excellent results for the year, despite significant external challenges. We announced significant projects across our core gasification, carbon capture and hydrogen growth platforms, including the net-zero hydrogen facility in Alberta, Canada and the massive blue hydrogen project in Louisiana, while also closing on the $12 billion Jazan acquisition. I remain very optimistic about the future of Air bovada .

What we say:

11-13-2021, APD's 4Q'21 revenue by business segments- Industrial Gases - Americas: $1,115M (+22%), EMEA: $674M (+33%), Asia: $754M (+6%). APD announced significant projects across its core gasification, carbon capture and hydrogen growth platforms, including the net-zero hydrogen facility in Alberta and the blue hydrogen project in Louisiana, and also closed the $12B Jazan acquisition. APD has guided FY22 AEPS of $10.20-$10.40/ share, up 13%-15% over the prior year and capital expenditures of $4.5-5.0B. Its dividend increase marked the 39th consecutive year of increases.

Investment Thesis

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APD has found an interesting way to position its business in a sector where most are stuck with commodity price fluctuations. As a provider of industrial gases, APD signs long-term contracts with its customers. Industrial customers are more interested in stability and reliability than costs since gases are a small part of their expenses but are vital to their business. ADP made a smart move in acquiring Shell’s and GE’s gasification businesses in 2018. The company became a leader in this field and has opened doors to expand its business in China and India. Finally, APD as an ambitious growth plan in motion including total capital expenditures of $18B. Those investments should support APD’s internal growth for the decade to come.

Potential Risks

While the APD core business is protected with long-term contracts, the business’s growth is still linked to the economic cycle. As an industrial gas supplier, APD sales will be directly contingent on demand for gases. It looks like we are getting away from the current recession, but keep in mind that demand will remain cyclical. APD is not the only company who made important acquisitions recently. Air Liquide bought Airgas in 2016 (market cap of $78B) and the Praxair-Linde merger in 2018 (market cap of over $130B) are two of the giants with which APD must compete. Competition will be fierce to grab market share. This usually comes with a price war leading to smaller margins. While APD has great hope of expanding its business in emerging markets, other players have the same plan.

Dividend Growth Perspective

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Air bovada & Chemicals has a stellar dividend streak that started back in 1982. While the APD price more than doubled between 2016 and 2020, its dividend increased from $0.81/share to $1.34/share (+65%). In 2021, the company rewarded shareholders with another 12% increase (to $1.50/share). That’s enough to forgive the low yield of 2%. With both payout and cash payout ratios between 50% and 60%, shareholders can expect more dividend growth in the coming years. There is no doubt APD is a candidate for Dividend King status in the future.

LAM RESEARCH CORP. (LRCX)

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The Company in a Nutshell

  • Lam’s wafer technology is used for almost all advanced chips. Its innovative wafer fabrication equipment and services allow chipmakers to build smaller, faster, and better performing electronic devices.
  • Through its Etch division LRCX gets strong margins providing cash flow for various projects all at once.
  • To stay on top LRCX is growing by acquisition like many other tech companies.

Business Model

Lam Research Corporation is a supplier of wafer fabrication equipment and services to the semiconductor industry. The Company designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits (ICs). It operates through manufacturing and servicing of wafer processing semiconductor manufacturing equipment segment. Its products and services are designed to help its customers build performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive vehicles, and data storage devices. Its customer base includes semiconductor memory, foundry, and integrated device manufacturers (IDMs) that make products such as non-volatile memory (NVM), dynamic random-access memory (DRAM), and logic devices. It offers its services in areas like nanoscale applications enablement, chemistry, plasma and fluidics and advanced systems engineering.

Latest Quarter Information

What the CEO said:

“Driven by strong demand and solid execution, Lam delivered its sixth consecutive quarter of record revenue and earnings per share,” said Tim Archer, Lam Research’s President and Chief Executive Officer. “In a robust wafer fabrication equipment environment, Lam is delivering the innovation needed for the success of our customers' semiconductor manufacturing roadmaps.”

What we say:

10-28-2021, LRCX reported a strong quarter but the company missed estimates. Nonetheless, revenues were up 36%, driven by 36% increase in system revenue to $2.92B and 34% increase in customer support-related revenue and other. Liquidity decreased to $4.9 billion (from $6B). This decrease was primarily the result of $1.2 billion of share repurchases, including net share settlement of employee stock-based compensation; $185.4 million of dividends paid to stockholders; and $136.4 million of capital expenditures, partially offset by $457.5 million of cash generated from operating activities.

Investment Thesis

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Lam rocks the market with solid results and surfs on many tailwinds. It is gaining market share in wafer fabrication equipment (WFE) used for radio frequency amplifiers, LEDs, optical computer components, and CPUs for computers. Lam Research’s strength lies in its high margins. The company counts many strong chipmakers (Samsung, Electronic Arts, Taiwan Semiconductor Manufacturing) as customers and offers a strategic service for them. These large chipmakers need Lam’s high-tech products to stay on top of their game. Therefore, LRCX is expected to grow faster than other players in its industry. While the stock price has surged, it’s 12-month forward PE ratio is 24. There is a price to pay for quality.

Potential Risks

Lam Research faces strong competition from Applied Material (AMAT) and Tokyo Electron. If LRCX invests well in the R&D to develop cutting edge technologies, it will be dominant. However, new players keep coming up with great technologies. While facing strong competition, LRCX must deal with the cyclical demand of semiconductors. We expect the company to see some growth in the coming years after most of its customers have reduced their inventories over the past 2 years. As you have seen back in 2018, LRCX’s stock price can be quite volatile as the demand for semiconductors fluctuates. Keep in mind demand for semiconductors is highly cyclical in line with companies’ investment cycle.

Dividend Growth Perspective

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Lam paid its first dividend in 2014. Lam’s quarterly payment started at $0.18/share and has risen to $1.30 since then. After its strong bullish stock price appreciation in 2019, LRCX now offers only a 1% yield. This is a company where you get both stock growth and dividend growth. LRCX shows a strong dividend triangle where both revenue and earnings are on an uptrend. LRCX currently shows payout ratios around 20-30%, leaving plenty of room for double-digit dividend growth for years to come. However, an investment in LRCX is more about the future of its high-tech products than about its current dividend income.

P.S. On Thursday, November 18th, I’ll be hosting a free webinar about how to position your portfolio for 2022 and I’ll answer all your questions. for this new webinar!

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**Please do your own due-diligence before investing in any stocks we discuss in this article**

I may hold shares of companies discussed in this article.

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