Air Liquide

The solid business of liquid raw materials

Have you heard of Air Liquide? To be honest, before I did my research, the company was mostly unknown to me. I knew the name and I'd seen the chart before, but I had no idea how they make their money. So today, let's take a look at Air Liquide. I can tell you this much up front: it's a really interesting company that, in my opinion, has a brilliant future ahead of it.

Much like Germany's Linde, the Paris-based group supplies its customers with gas. And its customers are spread across far more industries than I first assumed. Air Liquide supplies heavy industry through its own pipelines, but it also delivers gas cylinders to smaller trade businesses. On top of that, there are medical facilities like hospitals that need oxygen or anesthetic gas. The food industry uses the gas to deep-freeze food. Sewage plants need it to clean our wastewater, and the electronics industry uses it in semiconductor manufacturing. The range of applications is extremely diverse - so it doesn't really matter if one industry hits a weak patch.

The history and business model of Air Liquide S.A.

Georges Claude was born in Paris in 1870. His father was a teacher himself, so he taught his son at home. Even though Claude never got a proper school diploma, he later studied at the Paris School of Physics and Chemistry. That's where he met his friend and later business partner Paul Delorme. After their studies, the two of them experimented together with a complicated process for separating air into its individual elements and liquefying it (Air Liquide = liquid air). For their research, they bought a compressed-air engine for 7,500 francs and rented space in an empty bus garage. After 2 years they had finally perfected the process, and in 1902 they founded L'Air Liquide. Delorme managed to win over several fellow engineers and investors, so the young company quickly brought 24 shareholders on board with total capital of 100,000 francs.

The two founders soon realized that transporting gases was very complicated and dangerous. So in order to supply customers worldwide, they had to go with local production sites. In 1905 a few plants were built in France first, from 1906 they expanded across Europe, and from 1907 they ventured into Japan. Canada followed in 1911, and in 1916 the USA was added too. Starting in the 1960s, Air Liquide built its own pipeline network. At that time there was booming demand for gas in industry, which the French were able to meet safely and quickly thanks to their pipelines. The company always invested a large portion of its profits in research and innovation. That's why, back in 1985, it was already perfectly positioned to supply the new, up-and-coming electronics industry with ultra-pure industrial gas.

To keep growing and to strengthen its business in the USA, Air Liquide acquired Big Three Industries in 1986, a competing industrial gas producer. To diversify more broadly, it founded the subsidiary Air Liquide Santé in 1995, which specialized in medical gases such as nitrogen, oxygen and anesthetic gases. Several more acquisitions in various areas followed. Then in 2016 came the biggest one so far, the acquisition of Airgas - a US gas cylinder supplier that was considered a pioneer in e-commerce with online ordering. Together they created very lucrative synergies that Air Liquide and its shareholders will benefit from for a long time to come. All in all, the company is very broadly positioned today and has a first-class distribution network that some competitors can only dream of.

What's next for Air Liquide?

Air Liquide relies on long-term supply contracts in which customers pay a fixed monthly amount, regardless of whether they used any gas or not. Naturally, that makes earnings predictable for the gas giant. And you can see that in the long-term share price, too. There actually was a small drop in profit in 2018, caused by higher tax expenses. Nevertheless, 2018 was the 2nd most successful fiscal year in the company's history - a little over €2 billion stayed in the coffers. By the way, the drop in profit before that was in 1991, and at 0.6% it was barely noticeable.

Besides gas, Air Liquide also offers hydrogen - and not in small amounts. Rightly so, this fuels investors' growth fantasies. Just imagine how the stock could go through the roof if the breakthrough for hydrogen cars finally happens. Air Liquide has now put more than 100 hydrogen filling stations into operation worldwide. If the breakthrough comes, they'll of course keep expanding that network. Personally, though, I think the oil lobby wants to keep making money with fossil fuels for a few more years. And you also have to acknowledge that the electric car industry is much more mature today than hydrogen technology. But if you want to get in on this trend early, you're better off doing it with a solid stock like Air Liquide than with a speculative penny stock.

So what about the dividend?

The 24 founding shareholders received their first profit distribution in 1907. The dividend has been paid every year since then. It hasn't been raised every year, though. The dividend yield is 2.1%. Combined with an average increase of 7% over the last 10 years, that's pretty decent. Air Liquide scores points with a "Loyalty Bonus": if you hold your shares for 2 years, you get a 10% higher dividend. Now that's what I call investor-friendly! At around 50%, the payout ratio is still acceptable. However, you shouldn't forget about the French withholding tax.

Conclusion:
Air Liquide is a broadly positioned company that has become indispensable. Its products are used and urgently needed in a great many areas and industries. With acquisitions and new innovations, the gas group offers enormous growth opportunities. I think the share price will keep rising in the long run, so I'll be adding the stock to my portfolio when a good opportunity comes along.