Air Products Spin-Off

18 Oct 2015 12:55
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In September Air Products (APD) announced a tax free spin-off of their materials business (press release link). The big question dividend growth investors should ask is "how does this affect my dividend and future growth". Using APD's 2014 Annual Report here is a segment breakdown:

in millions of dollars
Sales 2014 2013 2012
Merchant Gases $4,250.7 $4,098.6 $3,662.4
Tonnage Gases $3,288.9 $3,387.3 $3,206.7
Electronics and Performance Materials $2,449.0 $2,243.4 $2,322.0
Equipment and Energy $450.4 $451.1 $420.1
Sale Totals $10,439.0 $10,180.4 $9,611.7
Materials % of sales 23.46% 22.04% 24.16%
Operating Income 2014 2013 2012
Merchant Gases $671.6 $680.5 $644.0
Tonnage Gases $484.9 $515.9 $512.0
Electronics and Performance Materials $425.3 $321.3 $425.6
Equipment and Energy $88.2 $65.5 $44.6
Operating Income Totals $1,670.0 $1,583.2 $1,626.2
Materials % of Operating Income 25.47% 20.29% 26.17%
2014 Operating Margins
Company Operating Margin 15.9%
Electronics and Performance Materials Operating Margin 17.4%

APD's materials business is a pretty decent business and they are not unloading it because of low margins, as seen by the 17.4% operating margin. The only knock I see is that sales are rather flat.

It appears APD is staying true to their 5 point improvement plan with the first point being "Focus on core products" which they define as industrial gases. By spinning off their materials it is actually more beneficial to the materials segment as they have complete control of their future and how to invest future income back into the business. This is one of the few spin-offs that actually makes sense for the business and shareholders.

In regards to dividends it will be interesting to see how this plays out. In 2014 APD paid out $627.7M in dividends and materials represented 25% of operating income. By removing the materials segment and not changing the dividend paid that will move the dividend payout ratio from 67% to 81%. That high of a payout ratio may not be sustainable, hopefully after the spin-off the dividend gets spread across the two companies so that APD can maintain their existing dividend payout ratio and give shareholders two dividend growth stocks.

Details of the spin-off have yet to be announced but if done correctly this could be good for everyone.

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