Investing

Billionaire David Shaw Says This Dividend Aristocrat Is His #1 Target

Rich Duprey

Published: October 12, 2024 8:12 am

David Shaw has long been known as the “King of Quants” because of his pioneering use of computers and algorithms to foster high-speed quantitative trading. 

A computer scientist by training who taught at Columbia University, Shaw founded his D.E. Shaw hedge fund in 1988 and has grown the shop from an initial $28 million in investment capital to over $60 billion today. The firm says it uses “a combination of quantitative and qualitative tools to uncover independent, hard-to-find sources of return across global public and private markets.” 

Since inception, the fund has generated annualized returns of 12.5% and has had only one year where it produced negative returns.

Shaw typically divides his investment strategy in two: alternative investments (assets that are not classified as stocks, bonds, or cash) and long-oriented investments. The hedge fund, though, just shook up the market by announcing he was targeting Air Products & Chemicals (NYSE:APD), a leading dividend-paying stock in the industrial gas market.

Announcing he had acquired a $1 billion stake in Air Products, Shaw called for significant changes in the company, including a clear CEO succession plan and fixing the stock’s underperformance by correcting deficiencies in its corporate governance policies and capital allocation. Let’s see why he has chosen to target this leading stock.

24/7 Wall St. Insights:

• D.E. Shaw is a hedge fund known for using computer models and algorithms to find attractive investment candidates. Its founder David Shaw has been called  the “King of Quants.”
• The billionaire investor is targeting Air Products & Chemicals (APD) as a candidate for activism, looking for a change in the CEO and the company’s capital allocation priorities.
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A company in need of a shakeup

Air Products is a Dividend Aristocrat, or a stock on the S&P 500 that has raised its dividend for 25 years or more. The industrial gas giant was founded in 1940 and after hiking its dividend in January, has 42 years of consecutive increases in its payout.

While it has generated total returns of 64% over the past five years, that badly lags the S&P 500 Industrial Gases index, which has outperformed by a two-to-one ratio. Competitors like Linde (NYSE:LIN) and Air Liquide (OTC:AIQUY) have done better, generating total returns of 164% and 92%, respectively.

Shaw sees part of the problem being Air Products’ CEO, Seifi Ghasemi, who is 80 years old and one of the oldest executives at an S&P 500 company. The hedge fund manager has nominated three people to run for APD’s board of directors, including Scott Sutton, the former CEO of specialty chemicals company Olin (NYSE:OLN). Sutton is seen as a possible replacement for Ghasemi.

Shaw was also critical of how Air Products had structured some of its large-scale infrastructure projects. Typically such deals include offtake agreements that guarantee a specific amount of cash flows based on the investment. APD, however, has failed to do so. Instead, it is committing to spending billions of dollars without any guarantee of a return. Shaw noted the “overwhelming majority” of the company’s clean hydrogen projects did not include such industry-standard protections.

The billionaire investor separately told Air Products’ board in September that those specific projects had “led to the destruction of roughly $15 billion of equity value within the core industrial gas business.”

In the sights of more than one activist investor

Shaw is not the only one interested in Air Products & Chemicals. Activist hedge fund operator Paul Hilal recently said his Mantle Ridge fund has also staked a $1 billion position in the industrial gas maker. He is seeking to overhaul the entire board.

While Air Products has lagged its peers over the past few years, year-to-date it is leading the pack, though most of those have come in the past month as Shaw began agitating for change.

Yet the company also posted strong third-quarter financials that saw adjusted earnings of $3.20 per share, handily beat expectations of $3.04 per share by Wall Street. Last year it posted earnings of $2.98 per share.

With a solid business that is in transition, several activist investors pushing for change, and a dividend that yields a healthy 2.2% annually, Air Products & Chemicals is a Dividend Aristocrat worth considering for your own portfolio.