Updated April 22, 2021 by Bob Ciura

The Dividend Aristocrats represent a group of 65 stocks in the S&P 500 Index, each with at least 25 consecutive years of dividend increases.

The Dividend Aristocrats are some of the highest quality dividend growth stocks in the entire stock market. For this reason, we review each Dividend Aristocrat individually each year.

You can download your full list of all 65 Dividend Aristocrats (along with key financial metrics like price / earnings ratios and dividend yields) by clicking the link below:

The next installment in the 2021 series takes a deeper look at Linde plc (LIN), which is on the list following its acquisition of Praxair, a former dividend aristocrat.

The acquisition of Praxair is likely to be a significant growth catalyst for many years to come. As a result, we see Linde positively as a dividend growth stock, albeit with a higher valuation.

Business overview

Linde plc – created through the merger of Linde AG and Praxair – is the world’s largest industrial gas company. After the merger, Linde AG has its headquarters in Great Britain. The company produces, sells and distributes atmospheric gases, process gases and specialty gases as well as high-performance surface coatings.

You can find Linde products and services in almost every industry in more than 100 countries around the world. The combined company now has annual sales of over $ 27 billion. Line is a large-cap stock with a market cap of $ 148 billion.

The company operates in five segments: America, EMEA, APAC, Engineering and Global Other. Linde gases are used in a wide variety of industries including energy, steelmaking, chemical processing, environmental protection, food processing, electronics, and more. The company also has a healthcare business that consists of medical gases and services.

Linde’s exposure to a specific geographic area has been enhanced thanks to the merger as it now has a strong global customer base in a wide variety of industries. In fact, Linde now serves customers in more than 100 countries around the world. Additionally, it’s size and scale like no other competitor, which puts it in an enviable position.

The company struggled in 2020 as the coronavirus pandemic plunged the U.S. economy into recession. Even so, the company remained highly profitable with a strong ROIC.

Source: Investor Presentation

In 2020, sales fell 3% to $ 27.2 billion. Still, the company was able to increase its adjusted earnings per share for the full year by 12% as operating profit margins increased 260 basis points in 2020.

The drop in sales in 2020 reflected the company’s reliance on a healthy economy. Nevertheless, Linde’s sales performance improved over the course of the year and the company returned to growth in the fourth quarter.

Revenue in the fourth quarter was total $7.3 Billion, that was above 3%. from the same quarter of the previous year. This was an improvement over that Previous quarters in which Linde posted declines in sales.

Linde was also able to significantly increase its profit margins, which is also possiblefor stronger earnings growth during the quarter. Merits– –Per– –The stock was $ 2.30 for the fourth quarterwhat on 22nd%. compared to the same quarter of the previous year.

Growth prospects

The Praxair merger has been the main growth driver for Linde in recent years. The results for 2020 continue to show the benefits of the acquisition in expanding margins. Although sales fell in the fourth quarter, Linde achieved double-digit adjusted EPS growth. Cost savings translate into much higher operating margins and earnings growth much faster than revenue.

The company’s increased cash flow can be seen in the following image:

Source: Investor Presentation

This slide gives us an overview of the types of savings the company expects over time and the methods used to achieve those synergies. These synergies continue to emerge, which means margins could continue to improve in 2021 and beyond.

Share buybacks will also be an important catalyst for Linde’s future earnings growth. Linde completed net share buybacks of $ 2.4 billion in 2020. This is impressive as many companies have restricted share buybacks to save cash. Linde also approved a $ 5 billion buyback for 2021.

In addition, the dividend was recently increased again by 10% for 2021. Linde takes ROI very seriously as the company is generating more money than it can invest profitably, resulting in these strong buyback and dividend numbers.

We assume that Linde will increase its earnings per share by 6% per year over the next five years. We view revenue growth as modest, on top of a small tailwind from margin growth and a lower number of stocks.

Competitive advantage and recession performance

Linde enjoys several competitive advantages. As a leading supplier of industrial gases, the company has an economic size and greater operational efficiency than its smaller competitors.

In addition, Linde’s financial resources enable the company to invest heavily in research and development. In 2020, Linde spent around US $ 152 million on research and development to expand and maintain its competitive advantages.

Another competitive advantage is Linde’s strong financial position. The company has a healthy balance sheet with a high credit rating of ‘A2’ from Moody’s and ‘A’ from Standard & Poor’s. Given that total debt has decreased since the merger was completed, we expect these ratings to be stable. By maintaining its investment grade credit rating, the company can access the capital markets at attractive costs so that Linde can spend its money on things like dividends and buybacks.

On the other hand, Linde is not a recession-resistant company. As a global industrial manufacturer, its business model is sensitive to fluctuations in the global economy. An economic downturn usually leads to lower demand from industrial customers.

Linde’s earnings per share during the Great Recession are as follows:

• 2008 earnings per share of $ 4.19
• 2009 earnings per share of $ 4.01 (down 4.3%)
• 2010 earnings per share of $ 3.84 (down 4.2%)
• 2011 earnings per share of $ 5.45 (up 42%)

While the company saw a slight decline in earnings per share during the recession, it was fortunate to see an improvement in earnings alongside the general recovery in the global economy. By 2011, Linde’s results had exceeded the 2008 level. We assume that Linde’s sales and margins will suffer in the next recession. Note, however, that the current growth outlook is robust.

Valuation and expected return

Linde is expected to achieve earnings per share of USD 9.20 in 2021. On this basis, stocks are currently trading at a price-earnings-ratio of 31.7. This is a high rating for the stock despite the fact that the company is highly profitable and earnings are growing satisfactorily. In addition, we see Linde receiving a premium rating due to its unmatched competitive position in the industry in which it operates.

Our fair value estimate for the stock is a price / earnings ratio of 21. This is a reasonable fair value target for a strong company with lasting competitive advantages.

As a result, Linde appears to be significantly overrated. If stocks were to see a declining valuation to match our fair value estimate, it would reduce the annual return by 7.9% per year. This is a strong headwind for investors buying at the current price level.

Future returns are driven by earnings growth and dividends. In addition to Linde’s expected earnings growth of 6% annually over the next five years, the stock has a current annualized dividend yield of 1.5%.

Linde can definitely be classified as a dividend growth stock. The last quarterly dividend distribution was increased by 10% compared to the previous dividend.

The combination of valuation changes, earnings growth and dividends results in an expected total return of -0.4% per year over the next five years. Earnings per share growth and dividend yield are virtually fully offset by valuation headwinds, which is why we consider the stock unattractive.

Linde is a very profitable company with positive prospects for earnings and dividend growth, but the impact of an overvaluation is enough to warrant a sell recommendation at current price.

Final thoughts

Linde shares have performed well since the merger with Praxair. The expectations of the combined company’s potential are high, but we currently believe that Linde shares are significantly overvalued.

Linde will be an industry leader with clear and lasting competitive advantages. The company should steadily increase sales and earnings in the future, provided the global economy remains outside the recession.

While Linde is a strong business, the stock is too highly valued to buy today. While Linde should keep increasing its dividend every year, investors should wait for a significant drop in the share price before buying Linde shares.

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