Multinational chemical company Linde (LIN -0.32%) has a lot to offer patient investors. In this clip from "Editorial" from Motley Fool Live, recorded on Jan. 18, Motley Fool contributor Lou Whiteman lists the reasons he's bullish on the stock, as well as a few things to watch out for, and what kind of role this stock could play in your portfolio.
Lou Whiteman: We're going to talk about a company Linde as they say over there, but this is a company I just put it out there. This is a gas company, chemicals, energy, food, beverages, electronics, healthcare manufacturing metals. All of these industrial gases that go into so many things, from healthcare to a lot of industrial processes. This is one of the big three around the globe that is bringing that to us, they've got a 30% global market share thanks to their massive acquisition of Praxair back in 2018. Air Products and [Air Liquide], a French company, are the other two. These three companies combined to about 80% of this market. What do we like about this business? This is a reoccurring revenue, almost to the point of being utility. They sign with big customers 10- to 20-year take-or-pay supply contracts. We'll talk about that in a second. For the customer blocks in rates, and for the provider, it is a massive amount of stability.
This company, particularly the reason we like them, is they have partnered with big customers, sign a 10- to 20-year agreement deal. They will build a facility on site then use that as a regional distribution hub, so you bring down costs that way. This is a company that with these take-or-pay contracts, they did have to give back some, but they were able to raise their dividend by 10% during the pandemic. The reason why is that this reoccurring revenue model really came through in the pandemic.
What you get and what you don't get with this, guys, this is a stable, strong cash flow story. We mentioned they've raised their dividend. I mean, you can see the operating cash flow numbers are just ridiculous here. Billions of dollars in each quarter. The downside is, it's really hard to grow here. It's really hard to take market share for the reasons I just mentioned. Once you have a locked in customer, it's really hard to shake that customer unless you screw up. It's really hard to also win that customer over, you don't tend to see competing gas plants put up in one region. Once a company has established on a region, it's really hard to knock them off. That's good for stability. It's hard for growth.
The way you get around that is greenfield growth, partnering with businesses when they need new supplies and build it there. We've seen that work to some extent. But you get what you get. This isn't a cheap stock. It's up 181% over the past five years, but it has beat the S&P 500 even without that dividend on a one- , three- and five-year basis. This is a company that we worry about with ESG because this is a dirty process, but they are trying to be climate neutral by 2050.
There's always going to be some emissions with this, but you can control your feedstocks, you can control your processes, you can try and bring that down, and they also could be a leader in clean hydrogen. Hydrogen is something that we've heard talked about forever in terms of potential battery, alternative way to bring fuel to transportation. But the problem with hydrogen is it tends to be a dirty way to make fuel. It's a zero-emission fuel once it is in the system but it is a dirty way to make it. There are ways to extract clean hydrogen. They are at the forefront of this.
This is a stock you do not want your portfolio full of utilities and gas stocks, period. You are not going to beat the market over time if this was your entire portfolio. But in a world where some of these high-growth names are getting a little shaky and there is a lot of drama, this should be a low-drama part of your portfolio and it can be a foundational stock. I really like this as just a proven, this works, use it company.
