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Will APD’s Capital Expenditure Cuts Increase Its Free Cash Flow?

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Air Products and Chemicals’ capital expenditure

Air Products and Chemicals’ (APD) management expects it to incur capital expenditure of $1.2 billion in fiscal 2016, compared to $1.8 billion in fiscal 2015. This implies a fall of ~31.5% on a year-over-year (or YoY) basis.

The major reason for the drop in capital expenditure is that the company intends to spend its capital on its backlog projects.

Analysts expect the capital expenditure of Air Products and Chemicals to be ~$416.5 million in fiscal 3Q16. Air Products and Chemicals’ capital spending activities will be related to backlog projects in India and Arkansas that are expected to be complete by fiscal 4Q16. The company expects better cash flow on its planned reductions in its capital expenditure.

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Dividends and cash usage

Air Products and Chemicals declared a quarterly dividend of $0.86 per share. The dividend is payable on August 8, 2016, with a record date of July 7. Analysts expect the company to maintain the same rate of dividend for the next quarter as well. In fiscal 2Q16, APD paid $175 million in cash dividends.

The company’s management expects its cash flow to be better in fiscal 3Q16. APD’s priorities for the usage of cash will be as follows:

  • maintaining ‘A’ credit rating
  • investing in good projects
  • making acquisitions
  • increasing dividend payments
  • making share buybacks, if excess cash is available

Investors can indirectly hold Air Products and Chemicals by investing in the iShares U.S. Basic Materials ETF (IYM), which held 5.3% of its portfolio in Air Products and Chemicals on July 22, 2016. The top holdings of the ETF include Dow Chemical (DOW), Monsanto (MON), and Praxair (PX) with weights of 10.8%, 8.5%, and 6.1%, respectively.

In the next part, we will look into analysts’ recommendations for Air Products and Chemicals.

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