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Dividend Kings In Focus: Emerson Electric


Updated on October 26th, 2024 by Felix Martinez

The Dividend Kings consist of companies that have raised dividends for at least 50 years. Over the decades, many of the companies have become huge multinational corporations, but not all of them.

You can see the full list of all 53 Dividend Kings here.

We created a full list of all Dividend Kings and important financial metrics like price-to-earnings ratios and dividend yields. You can download your copy of the Dividend Kings list by clicking on the link below:

 

Emerson Electric (EMR) has raised its dividend for 67 consecutive years, one of the longest dividend growth streaks in the investing universe. Only four companies have longer dividend growth streaks than Emerson.

The company has achieved an exceptional dividend growth record thanks to its strong business model, decent resilience to downturns, and somewhat conservative payout ratio, which provide a margin of safety during recessions.

In this article, we’ll review Emerson’s prospects as an investment today.

Business Overview

Emerson Electric was founded in Missouri in 1890. Since then, it has evolved from a regional manufacturer of electric motors and fans into a technology and engineering company that provides solutions to industrial, commercial, and individual customers.

It is a global leader with a presence in more than 150 countries and operates in two segments: Automation Solutions and Commercial & Residential Solutions.

The Automation Solutions segment generates ~65% of the total revenue and offers industrial equipment and software to the oil and gas industry, refining, power generation, and other industries.

The Commercial & Residential Solutions segment, which generates the remaining 35% of the total revenue, offers residential and commercial heating and air conditioning products.

Emerson generates the majority of its revenue from the oil and gas industry. This industry is infamous for the dramatic swings in commodity prices, so Emerson is highly sensitive to industry cycles.

This helps explain the 34% decrease in Emerson’s earnings per share from 2014 to 2016, which coincided with the fierce downturn in the energy sector caused by the collapse of oil and gas prices during that period.

Emerson faced another downturn in 2020 due to the coronavirus crisis. The pandemic caused a collapse in global demand for industrial products this year, which in turn caused a major downturn in the energy sector.

Source: Investor Presentation

Emerson reported its third-quarter 2024 financial results on August 7, 2024, with positive gains in net sales, adjusted earnings per share (EPS), and free cash flow. For Q3, Emerson’s net sales grew 11% to $4.38 billion, while adjusted EPS increased 11% to $1.43. Operating and free cash flow also rose by 27% each, reflecting robust cash generation. However, pretax earnings declined from $822 million to $455 million, causing a margin drop to 10.4% from the previous year’s 20.8%. Emerson declared a quarterly dividend of $0.525 per share, payable on September 10, 2024.

CEO Lal Karsanbhai emphasized the company’s strong performance in orders, profitability, and cash flow, noting that demand in the process and hybrid markets is on target. He highlighted Emerson’s operating leverage due to the company’s advanced technology and streamlined management system, reinforcing their 2024 growth strategy. Additionally, Karsanbhai mentioned the company’s strategic focus on automation, which was marked by the definitive decision to divest the Copeland business fully, which will position Emerson more effectively in the high-growth automation sector.

Looking forward, Emerson updated its fiscal year 2024 outlook, projecting a 15% increase in net sales, approximately 6% underlying sales growth, and adjusted EPS in the range of $5.45 to $5.50. Emerson plans to return approximately $300 million to shareholders through buybacks and $1.2 billion through dividends. The company anticipates around $3.2 billion in operating cash flow and $2.8 billion in free cash flow, aiming to maintain shareholder value and support its high-margin automation portfolio.

Growth Prospects

Emerson has pursued growth by expanding its customer base and acquiring many companies. The company regularly acquires and divests parts of its business to create an optimal portfolio mix.

Source: Investor Presentation

The Aspentech transaction is huge for Emerson, and gives the acquirer access to Aspentech’s double-digit annual earnings growth. In addition, Emerson divested its Therm-O-Disc business and sold its Russia business following that country’s invasion of Ukraine.

On the other hand, it is critical to note that Emerson only managed marginal earnings-per-share growth from 2011-2020. This is a reminder of Emerson’s dependence on the highly cyclical oil and gas industry. This exposure can bring extraordinary returns during booming years but also erase many years of growth during a severe downturn. Emerson is trying to diversify away from this, which has driven many portfolio actions in recent years. We believe this diversification is critical to Emerson’s future success.

Thanks to its recent acquisitions and modest organic growth, we expect Emerson to grow its earnings per share at a 9.0% average annual rate over the next five years. This growth will be comprised partly of revenue growth but also share repurchases.

Competitive Advantages & Recession Performance

Emerson has served its customers for several decades, building great expertise in the markets it serves. In addition, thanks to its large scale and dominant global presence, it has a great reputation. This provides the company with a significant competitive advantage.

On the other hand, due to its reliance on industrial and commercial customers, Emerson is vulnerable to recessions and downturns in the energy sector. In the Great Recession, its earnings per share were as follows:

Emerson survived the Great Recession with just one year of declining earnings per share, which is certainly impressive.

Emerson was more heavily affected by the downturn of the energy sector, which was caused by the collapse of the price of oil from $100 in mid-2014 to $26 in early 2016. Its earnings per share decreased 34%, from $3.75 in 2014 to $2.46 in 2016, and only eclipsed that level for the first time in 2021.

Given its sensitivity to economic cycles, it is impressive that Emerson has grown its dividend for 67 consecutive years. The exceptional dividend record can be attributed to the company’s decent resilience during downturns.

Another reason is the conservative payout ratio, which should be about 38% for this year. This provides a material margin of safety for the dividend during economic downturns.

Valuation & Expected Returns

Based on the expected adjusted EPS of $4.50 for fiscal 2024, Emerson is currently trading at just 19.7 times its expected EPS. This earnings multiple is much higher than our estimate of fair value at 19 times earnings. That implies a weak ~-1.5% annual return from a higher valuation should it reach 19 times earnings again.

With 9% expected annual earnings-per-share growth, a 1.9% dividend yield, and a -1.5% annualized contraction of the price-to-earnings ratio, we expect Emerson stock to generate a 9.4% average annual return over the next five years.

Final Thoughts

Emerson has an impressive dividend growth record, particularly given its heavy reliance on industrial and commercial customers, who struggle during recessions or downturns in the energy sector. The stock’s strong dividend yield and reliable dividend growth make it suitable for some income-oriented investors.

We see the stock as overvalued today but with renewed growth and a strong earnings base. The 9.4%+ projected annual returns are not good enough to earn a buy rating for Emerson. Thus, we rate the stock as a hold at the current price level.

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:

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