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URL:  http://boards.fool.com/hi-kelbon-great-point-and-youre-absolutely-30690167.aspx

Subject:  Re: iPIG Portfolio FAQ v. 1.0.1 Date:  5/17/2013  11:06 PM
Author:  TMFBigFrog Number:  124 of 546

Hi kelbon,

Great point, and you're absolutely correct that the company has a lot of capital expenditures and that because of those capital expenditures, its dividend payments exceed free cash flow. APD's dividends are covered by operating cash flow, just not free cash flow.

The tough question on the capital expenditures is how much of it is 'maintenance' capex needed to keep doing what it's already doing and how much is 'expansion/efficiency' capex needed to grow the business or operate more efficiently. In some of its earnings presentations, it specifically calls out its growth plans which require capex... For the sake of simplicity, the shortcut guesstimate I use more or less assumes capex up to the level of depreciation is 'maintenance' while capex above that level is 'expansion/efficiency'.

If that guesstimate is in the ballpark, on an annual basis (though not every quarter), APD would generally be covering its dividend and maintenance capex from cash flows and borrowing a chunk of the money for its expansion/efficiency improvements.

You can certainly make the case that it's a riskier model than one where the company completely self-funds dividends, maintenance, and expansion entirely from operating cash flow. But as long as the company proves itself to be capable of effectively using the borrowed cash to profitably expand and doesn't over-leverage itself, I don't mind borrowing that supports expansion or efficiency capex.

Regards,
-Chuck
Inside Value Home Fool
Disclosure: I own shares of Air Products & Chemicals (APD)

PS: Note the box over on the right -- the first post in this thread is now the board's FAQ. :) Thanks to all who participated in the questions and discussions.
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