Updated on February 4th, 2019 by Josh Arnold
Out of the 500 stocks in the S&P 500 Index, there are just 57 Dividend Aristocrats, which have raised their dividends for 25+ consecutive years.
Each year, we individually review all of the Dividend Aristocrats. The next installment in the series is industrial giant Emerson Electric (EMR).
Emerson is not just a Dividend Aristocrat. It is also a Dividend King, which is an even smaller group of companies, with 50+ consecutive years of dividend increases. You can see all the Dividend Kings here.
Emerson has increased its dividend for 62 years in a row. This means Emerson has one of the longest dividend growth streaks in the entire stock market.
A more detailed analysis of Emerson’s dividend safety can be viewed in the video below:
Emerson Electric was founded in Missouri in 1890 by two Scottish brothers, Charles and Alexander Meston, who saw a potential business opportunity in manufacturing reliable electric motors.
The two brothers received a start-up investment from John Wesley Emerson, a former Union army officer, judge, and lawyer. Together, the three formed The Emerson Manufacturing Company.
Since its founding, it has evolved through organic growth as well as strategic acquisitions and divestitures from a regional manufacturer of electric motors and fans into a diversified global leader in technology and engineering. Its global customer base affords it $19 billion in annual revenue and a current market capitalization of $42 billion.
Emerson is organized into two major reporting segments called Automation Solutions and Commercial & Residential Solutions.
Source: Investor Presentation
Automation Solutions helps manufacturers minimize energy usage, waste, and other costs in their processes. The Commercial & Residential Solutions segment makes products that protect food quality and safety, as well as boost efficiency in the production process.
Today, Emerson does business around the world, and has about 75,000 employees.
Emerson has just come out of a period of intense transition. The company has endured a difficult few years due to a number of headwinds including a strong U.S. dollar, slowing economic growth rates in China, and the steep decline in oil and gas prices. All of these factors weighed on Emerson by varying degrees, and more recently, oil and gas prices have been a larger issue.
Note: Many of Emerson’s customers are in the energy sector, which is why low oil and gas prices affect the company negatively.
As a result, Emerson’s revenue results have been very weak in recent years, as fiscal 2018’s total revenue was actually less than that of fiscal 2014. Part of this is due to nearly constant divestitures as Emerson remade itself, but it has added companies to its portfolio as well during that time. Emerson’s performance simply hasn’t been very good during this time frame.
In response, Emerson has undertaken a significant restructuring of its business model. First, it slashed costs to keep profits afloat.
The restructuring has resulted in hundreds of millions in additional operating profits hitting Emerson’s bottom line. This has helped boost Emerson’s earnings-per-share significantly in the past couple of years, with 2018 earnings-per-share growing 36% over the prior year.
Cost reductions, combined with organic sales growth, acquisitions, and share repurchases, are expected to fuel at least 10% annual earnings growth through 2021.
Source: Investor Presentation
Emerson produced a 5% gain on the top line in fiscal 2018 as well, putting in a sales increase for only the second time since 2013.
Emerson continues to acquire and divest companies in its portfolio to optimize the amount of revenue risk it is taking and focus on longer-term growth opportunities. Recently, Emerson has acquired Advanced Engineering Valves, a manufacturer of innovative valve technology that helps LNG customers operate more efficiently.
In addition, it has acquired the intelligence platforms business from General Electric, affording it the ability to expand its capabilities in machine learning and discrete applications. Acquisitions and divestitures are a way of life for Emerson and the ever-shifting mix of business has been beneficial in recent years.
Emerson’s Commercial & Residential Solutions business has typically been the growth driver of the company. However, the Automation Solutions segment has improved meaningfully in recent quarters and is now a growth driver in its own right.
Management expects consolidated order growth in 2019 of 5% to 10% with Automation Solutions actually leading the way. Recent moves to improve that segment’s mix have clearly paid off and acquisitions continue to drive order growth as well.
For all of fiscal 2019, Emerson expects earnings-per-share to come in at $3.55 to $3.70, which compares favorably to 2018’s earnings-per-share number of $3.46. At the midpoint, that suggests just 5% earnings-per-share growth this year, but Emerson expects its tax rate to move much higher, from 17% to 25%, which will remove 34 cents from earnings-per-share this year. Accounting for some one-time costs that occurred in 2018, total non-operating items will reduce earnings-per-share by ~22 cents this year.
Without those adjustments, Emerson expects to produce ~12% growth in earnings-per-share for 2019, so its strategy appears to be working. While we see 2019 as another strong year of growth, we expect Emerson to produce 5% earnings-per-share growth over full economic cycles.
Its exposure to cyclical industries such as oil and gas is a risk over time, and its spotty performance in recent years – while improving – is a key factor as well. Emerson has made progress on many fronts including revenue growth and margin expansion.
Competitive Advantages & Recession Performance
Emerson’s two main competitive advantages are its global scale, and proprietary technology. Emerson generates high margins and returns on capital thanks to its enormous global distribution network.
Emerson’s constant investment in new technology – totaling hundreds of millions of dollars annually – has given the company a leadership position across its two product segments. Its competitive advantages also allow it to navigate recessions better than most industrials.
Emerson’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $2.66
- 2008 earnings-per-share of $3.11 (17% increase)
- 2009 earnings-per-share of $2.27 (27% decline)
- 2010 earnings-per-share of $2.60 (15% increase)
- 2011 earnings-per-share of $3.24 (25% increase, new post-recession high)
Emerson performed relatively well during the Great Recession, with only one year of declining earnings. Normally, industrial manufacturers are tied to the health of the global economy. Its resilience during the Great Recession is a credit to its competitive advantages.
Valuation & Expected Returns
Emerson’s valuation has come down significantly in recent years, and for the first time in a few years, it is trading at our estimate of fair value. Indeed, the stock trades for 18.4 times the midpoint of earnings-per-share guidance provided by management, which compares to our estimate of fair value at 18.3 times earnings.
Today, the stock is fairly valued. This is a vast change from recent years when the valuation crept into the mid-20s, and was overvalued.
A breakdown of Emerson’s historical stock valuations can be seen in the following table:
Looking ahead, we see Emerson as producing ~8% total annual returns for shareholders. This will consist of the current yield near 3%, earnings-per-share growth of 5% and essentially no impact from the valuation as it is at fair value. The stock is certainly much more favorably priced than it has been in the past, but it isn’t cheap enough yet for us to call it a buy.
As a result, we think Emerson is a good pick for those seeking income and dividend growth, but those looking for earnings growth or value should look elsewhere. We rate Emerson a hold at today’s prices.
Emerson is a high-quality business, with a long history of steady growth. It has rewarded shareholders along the way, with more than six decades of annual dividend growth.
Right now may not be the best buying opportunity for the stock. Although the valuation has improved significantly, it is only just trading at fair value. Investors that want to initiate a position would do well to try and wait for a lower valuation.
However, Emerson has a solid 3% dividend yield, and remains a sure bet to increase its dividend each year.