Emerson Electric (EMR) Stock Analysis

What a month it has been for the market and it seems like every day there was a development that caused the stock market to toss and turn.  Heck, the turbulent market allowed the two of us to purchase shares of Norfolk Southern Corporation and Lanny to continue to decrease his average cost basis per share in Canadian Imperial.  The buying hasn’t stopped with us, as many other dividend growth investors in the community  have purchased some solid companies as well.  Through all of this, one Dividend Aristocrat’s stock price continues to fall (Down 13.4% YTD!) and pop up on my personal stock screener.  So I thought “why not analyze the company to see if I should use my excess capital to purchase shares?” Now, it is time to put Emerson Electric (EMR) through the Dividend Diplomats’ Stock Screener!

EMR

About Emerson Electric

Emerson Electric (“EMR”) is a diversified industrial company headquartered in St. Louis, MO.  The company has five major operating segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions;  the largest of which is process management.   The landscape of the company is going to change over the next coming year, as EMR announced that the company intends to spin-off its Network Power operating segment in 2016.  Personally, I think spin-offs are fascinating and have the opportunity to provide customers with a great new dividend paying stock, hence my interest in reviewing Edgewell Personal Care Company last month.  However, since the announcement was a few weeks ago, this spin-off is still a bit of an unknown as there is not a lot of information about the new company, their dividend policy, or EMR’s dividend post spin-off.   Over time though, this will obviously change as the company’s approach their spin-off date and I’ll do my best to keep you all updated.

Before diving into the metrics, I wanted to discuss two of the aspects of the company that I love.  First,  the company is a market leader in an industry that can have high barriers to entry and switching costs.  Since EMR’s equipment, processes, and knowledge become so involved in the day-to-day operations of their clients, it is difficult to simply switch providers due to the fact that “X” provider undercut my price by 10% (unlike cable providers, which I had a battle with for hours today. Man I wish I could just cut the cord like Lanny).  Switching in this industry is a costly and time-consuming process, both are attributes that most  companies will try to avoid.  In addition, with EMR’s  position as a market leader, resources, and R&D, the company possesses the tools to continue to provide their customers with products that their competitors may not have the capital to offer.  Morningstar does a much better job at assessing moats than I can, so it is a huge positive in my eyes when Morningstar rates EMR with 4 stars.

The other aspect that I like is their current management team.  Their current CEO has been with the company for longer than I have been alive and since he took over as CEO in the early 2000s, he has placed an emphasis on providing shareholders with rock-solid returns.  While I will dive into the specifics later on in the article, this chart from DiviData.com does a great job highlighting the fact that the company’s annual dividend increases did not begin to take off until the 2000s.  After looking at this chart, there is no question that this management team is committed to providing shareholders with returns…music to my and all dividend growth investors ears.

EMR Dividend History

 

Dividend Diplomats Stock Screener

After reviewing the company, I believe EMR is a solid company with a great foundation.  High barriers to entry, management committed to providing shareholder value, position as a market leader, do I need to say more?  Hey Lanny, how is EMR not listed as one of your Top 5 Foundation Stocks?  We may need to have a talk about your list!  Part of our strategy here is to not only find great dividend growth stocks, but great dividend stocks that are undervalued to see if we can get the most bang for our buck.  We believe we have built a stock screener that allows us to do just that, so let’s see how EMR performs in our stock screener and other metrics that have been added over the years.

  1. P/E Ratio less than the S&P 500 – First, we look to see how EMR’s PE ratio compares to the market place.  Why would we buy a stock trading at a premium when there are so many other discounts available now?  The S&P 500’s current PE ratio is over 20x, which is much higher than’s EMR’s current PE ratio 13.8X per TheStreet.com.  Plus, using The Street’s average earnings estimate for fiscal year 2016, EMR’s forward PE ratio is 14.8X (EPS = $3.35).  A very nice positive as EMR is trading at a discount compared to the market place.  Since it is difficult to pin a direct competitor even though company’s like GE and Honeywell compete with EMR in certain segments but not all, I will pass on comparing EMR to industry peers for the purposes of this stock analysis.
  2. Payout Ratio < 60%– As mentioned in Bullet #1, EMR’s forward EPS estimates are $3.35/share.  With the company’s current quarterly dividend of $.47/share, the company’s forward payout ratio is 56%.  Below our targeted threshold of 60%…another positive for EMR.
  3. Increasing Dividends.  EMR knocks this metric out of the park, as the company has been paying and increasing their dividend for 42 years.  That my friends is how you earn the title Dividend Aristocrat!  The company has sported some pretty nice dividend growth rates over the last decade.  The 3, 5, and 10 year average dividend growth rates are 5.56%, 7.12%, and 8.63%, respectively.  At first glance, you would think that the dividend growth rate is gradually decreasing.  However, last November, EMR announced a dividend increase of over 9%.  So some years there are great increases and some years there are poor increases.  Regardless, since the company continues to increase their dividend, it is another positive for the purposes of our stock screener.
  4. 5 year Average Dividend Yield Comparison– The 3 metrics of our stock screener are officially over and EMR passed with flying colors.   Over our blog’s first year, Lanny developed some great complimentary metrics that we review once a company passes our stock screener.  The first of these metrics is comparing the current dividend yield to the 5 year average dividend yield to see if the company is potentially undervalued.  This metric works very well for a company like EMR that has a long history of paying increasing dividends and a management team that has not drastically changed their dividend policy over the last several years.  EMR’s current dividend yield is 3.57%, which is greater than the 5 year average dividend yield of 2.87%.  Boom, another positive.
  5. Share Buyback Programs–  We like share buyback programs on this website because we believe they are another great tool to provide dividend investors value.  After reviewing the March 31 10-Q filings, EMR’s outstanding share count has decreased 4.77% over the years.  So the company is not only provide value to shareholders through strong dividend increases and spin-offs, they are also decreasing their share count along the way.  Once again, another positive!
  6. Does adding EMR improve my portfolio’s average dividend yield or growth rate?  One of my goals from last year after reviewing my portfolio was to purchase a stock that will either (or both) increase my portfolio’s dividend yield or weighted average dividend growth rate.  Why add a stock if it is going to decrease two of the key components for dividend growth investing?  EMR’s yield is slightly below my portfolio’s average yield; however, the most recent dividend increase of over 9% exceeds my portfolio’s WA rate of ~7.5%.  So yet another positive for EMR!

Summary

After this analysis, I really like this stock and would love to initiate a position in my portfolio.  EMR passed every metric we reviewed above and I think the company has a great foundation/management team.   Plus, adding a company like EMR to my portfolio would address a current hole since I do not own any industrial equipment industries.  A little extra diversification can’t hurt, right?  The one downside that jumps out at me is that EMR operates in a cyclical industry and I believe that we are staring a down cycle right in the eyes.  However, since I am a buy and hold investor, I place greater emphasis on the fact that management is experienced and has a demonstrated that they are committed to provide value to shareholders over the years than short-term cycles.  Certainly this is not EMR’s first or last down-cycle and what is important is that management has still managed to grow their dividend over the years.   Based on my analysis, I am going to strongly consider buying shares with my automatic trade on Tuesday.  Barring a sudden increase on Monday, get ready for a purchase article later in the week!

What are your thoughts about EMR?  Are they on your watch list or have you bought them recently?  Should I be more concerned about the company’s poor performance in 2015?  Do you think there are better values out there in the marketplace?

-Bert

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER OR ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING.
Facebooktwitterredditpinterestlinkedinmail

9 thoughts on “Emerson Electric (EMR) Stock Analysis

  1. I completely agree with your analysis. I have buying buying EMR and averaging down. I think I can squeeze one more buy from this aristocrat.
    D4s

    • Thanks Div4son! EMR is a great company and I cannot wait to be a shareholder. I am glad to hear that you have been taking advantage of their down year to average down and increase your position. In the short-term it won’t be a popular move but your long-term self will be thanking you 10-15 years from now. Hopefully this will be one of a few purchases for me. I would love to establish a position of ~$3k when all is said and done. But it will definitely take a few different purchases to achieve that.

      Thanks for stopping by.

      Bert

  2. I have had them on my monitor for quite some time, just waiting for the price to go lower 2/3% more, then I will start averaging down. Oh yes I own a little stocks but need to increase the volume ad it’s one of my backbone stocks in the PF…

    • Stalfare,

      Honestly, I am just excited to initiate a position and do not want to wait for the stock to continue to fall. Who knows with this market, so I just want to jump on in and set my position now before it is too late and increases. Hopefully the price continues to fall so I can continue to average down my cost with you haha

      Based on this analysis, it seems like it is a great stock to have as your backbone. I have been thinking a lot about your situation and I have a similar. I have some positions that are small that I would like to continue to build over time. Prior to this analysis, I was considering increasing my position in IBM and CM with my extra capital since both positions are well below my portfolio’s average. However, I think I am going to scratch that plan and build a solid entry position in EMR. There will be future opportunities for me to throw $500 more at a smaller position, so I will focus on increasing them at a future date. However, you can’t ever go wrong if you choose otherwise and decide to increase a position in your portfolio. Heck, it is a win-win in my eyes!

      Thanks for stopping by!

      Bert

  3. Bert,

    Good stuff!

    One of my oldest holdings. I’m strongly thinking about adding one more tranche here if it stays at this price. Great dividend growth track record and the valuation is there for me. The growth has been a bit lackluster over the last decade, but it’s a cyclical play. Regardless, cash flow remains quite strong.

    Cheers!

    • Thanks DM! You hit the nail on the head. The cash flow has remained strong and the company continues to reward shareholders with dividend growth, spin-offs, etc. I think the company is a heck of a foundation stock for a dividend growth portfolio and I would recommend it to many. This is why we have screeners and guidlines for picking stocks, so we can identify these strong companies that have fallen out of favor for whatever reason. EMR checked every box that I have, so I would be a fool not to initiate a position at this price, right? Hopefully you will be purchasing with me this week haha

      Hope you are having a great summer! As always, thanks for stopping by.

      Bert

  4. Hi Dividenddiplomats,

    First, thanks a lot for your inspiring blog! Have been truly helpful for me as a citizen outside of US.

    I have one question regarding the calculation of DGR (for own purposes) if you have time to help me (“3, 5, and 10 year average dividend growth rates are 5.56%, 7.12%, and 8.63%, respectively”). By having a look at Nasdaq the 2009 quarterly dividend began with 0,33 and 2014 quarterly dividend ended with 0,47 (excel formula gives =((0,47/0,33)^(4/23))-1 = 6,34 % 5Y CAGR), or if we calculate it more quickly by taking the annual dividends: 2009 div 1,325 (0,33+0,33+0,33+0,335) and 2014 div 1,76 (0,43+0,43+0,430,47) (excel formula gives =((1,76/1,325)^(1/5))-1 = 5,84% 5Y CAGR). Would be truly grateful if you could guide me in how you calculated the 5Y CAGR to 7,12%.

    Thanks a lot!

    Best regards
    Swedish dividender

    • Swedish Dividender,

      Thank you very much for the kind words and stopping by. Very, very kind of you. To calculate my 5 year growth rate, I took the annual percent dividend increase for the last five years and averaged the five figures. They last dividend increase was 9.30% (.47-.43/.43), two years ago it was 4.88% (.43-.41/.41), and so on. I calculated increases of 9.3%, 4.88%, 2.5%, 15.94%, and 2.99%, averaging to 7.12%. Hopefully that helps!

      Bert

Leave a Reply

Your email address will not be published. Required fields are marked *