A dominant player in the industrial gas market, with plenty of “moats,” Linde (LIN) is a global industrial gas giant with little competition in products with inelastic demand.
Linde had significant growth momentum in 2021. According to its CEO, Steve Angel, it can maintain this momentum in a challenging environment, thanks to strong momentum. I’m bullish on the shares of LIN.
“2021 was another successful year for the company thanks to the extraordinary work of our employees worldwide,” said Angel following the release of the company’s Q4 financial results.
“The Linde team delivered another quarter of record financial results by growing EPS 20%, operating cash flow 33%, and increasing ROC to 17.7%–all while positioning the company for future growth with contractually secured project backlog of $13 billion. In addition, the company stepped its commitment to reduce GHG emissions, targeting 35% reduction by 2035 and climate neutrality by 2050.”
A Challenging Environment
As is the case with other industries, Linde is facing a challenging environment due to the resurgence of inflation, which currently runs at an annual rate of 7.5% in the U.S., well above the Federal Reserve’s 2% conventional target. This raises the prospect of interest rate hikes, making alternative investments more appealing.
Meanwhile, higher inflation raises the cost of producing goods and services, undermining the bottom line of listed companies. However, this is not a problem for companies that operate in an oligopolistic environment.
These types of companies can pass on the higher costs to their customers and maintain stable cash flows that can be used to enhance shareholder value through dividend hikes and share repurchases. Linde is one of these companies.
This means that the company has strong pricing power in good times and bad times and can offset rising costs on the supply chain and maintain high-profit margins. For instance, the company’s adjusted operating margin remained at 22.2% in 2021, despite the rising materials costs experienced across the industry.
Wall Street has noticed. Over the last five years, Linde’s shares have gained 158% compared to an 85% gain of the S&P 500 (SPY) and 71% for its close competitor Air Products and Chemicals (APD).
Wall Street’s Take
Wall Street analysts are bullish on Linde’s prospects. The 19 Wall Street analysts following Linde collectively rate the stock as a Strong Buy, based on 16 Buys and three Holds assigned in the past three months. The average Linde price target of $377.52 represents 24.7% upside potential from its current price.
Among the things that make analysts bullish is the company’s strong free cash flow, which has helped the company enhance shareholder value through dividend hikes and share buybacks.
Linde has a solid track record of raising its dividends year after year. In 2012, it ended the year with a dividend per share of $1.65; its current dividend per share is $4.24. It has been able to raise its dividend thanks to its robust cash flows. Because of its strong cash returns, this dividend can protect shareholder income from inflation.
Additionally, Linde’s $5 billion share repurchase program, which was announced last January, can provide even more downward protection if the value of the company’s shares drops, thanks to higher inflation.
Summary and Conclusions
Linde is a typical company with a strong, sustainable competitive advantage, thanks to limited competition and plenty of “moats” to protect its market from new competitors. That’s why the company can survive and thrive in any market environment and deliver superior returns to its shareholders.
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