Updated on February 11th, 2022 by Bob Ciura
Investors looking for the best dividend growth stocks should consider the Dividend Aristocrats. We believe these are the “cream of the crop” when it comes to dividend growth stocks.
Out of the 500 stocks in the S&P 500 Index, there are just 66 Dividend Aristocrats, who have raised their dividends for 25+ consecutive years.
To raise dividends for 25 consecutive years, a company must possess a strong business model, with steady growth and the ability to generate profits even during recessions. Therefore, it is relatively difficult to become a Dividend Aristocrat.
You can see a full list of all 66 Dividend Aristocrats, along with important financial metrics like dividend yields and price-to-earnings ratios, by clicking on the link below:
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 just 39 companies with 50+ consecutive years of dividend increases. You can see all the Dividend Kings here.
Emerson has increased its dividend for a staggering 65 years in a row.
This means Emerson has one of the longest dividend growth streaks in the entire stock market. This article will discuss Emerson’s business model, growth prospects, and whether the stock is a buy right now based on these factors.
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, Emerson 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 $58 billion.
Emerson is organized into two major reporting segments called Automation Solutions and Commercial & Residential Solutions. 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.
The company prides itself on solving complex engineering tasks for its customers, which leads to high customer retention rates as Emerson provides unique solutions to its customers’ problems.
Emerson is emerging from of a period of intense transition. Many of Emerson’s customers are in the energy sector, which is why low oil and gas prices affect the company negatively. This was a major drag on the company’s results for several years.
However, the reverse is also true–high energy prices are a positive growth catalyst. And, with oil prices rising above $90 per barrel in the U.S., Emerson’s exposure to the energy sector could be a tailwind going forward.
2020 was a difficult year, not just for the above reasons, but also because of the coronavirus pandemic and the ensuing impact on the global economy. And yet, Emerson remained highly profitable, which allowed it to continue increasing its dividend.
The company recently concluded its fiscal 2022 first quarter. You can see the highlights in the below image:
Source: Investor Presentation
Earnings-per-share came to $1.05 for the quarter, which was four cents ahead of estimates. Revenue beat by $20 million, gaining 8% year-over-year to $4.5 billion. Net income was $896 million for the quarter, up from $445 million a year ago.
Cost of sales rose 8%, but Emerson noted this was lower than the 10% increase from Q4, indicating those pressures may be moderating somewhat. Trailing–three–months underlying orders were up 17%, indicating good end–user demand despite cost pressures and supply constraints.
Q2 guidance is for earnings–per–share of $1.15 to $1.20, roughly in line with expectations. Revenue growth is now expected to come to ~5%.
Cost reductions, combined with organic sales growth, acquisitions, and share repurchases, are expected to fuel 6% annual earnings growth over the next five years.
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.
However, we note that Emerson can see cycle tops without a recession, as has been the case in the past.
Valuation & Expected Returns
Emerson shares trade for 19.1 times the midpoint of fiscal 2022 expected EPS, which compares to our estimate of fair value at 19 times earnings.
Today, the stock is fairly valued. Therefore, future returns will be comprised mainly of EPS growth (6%) and dividends (2.1%), leading to total expected returns of about 8% per year over the next five years.
As a result, while we like Emerson’s outstanding dividend history, we think the stock is a hold right now given that its expected returns are below 10%.
Emerson is a hold due to its market-beating dividend yield and annual dividend increases, but the stock is not a buy right now due to valuation.
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.
The company engineered a highly successful turnaround in the past few years, ridding itself of under-performing businesses and consolidating its operations for better efficiency.
Investors can expect the company to continue raising its dividend each year, even during recessions.
Right now may not be the best buying opportunity for the stock. The valuation has expanded thanks to a sharp rally in the stock, so investors that want to initiate a position would do well to wait for a lower price.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: