Updated on September 25th, 2023 by Felix Martinez
The Dividend Kings consist of companies that have raised dividends for at least 50 years. Many of the companies have turned into huge multinational corporations over the decades, but not all of them.
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Emerson Electric (EMR) has raised its dividend for 66 consecutive years, giving it one of the longest dividend growth streaks in the investing universe. There are only four companies that have longer dividend growth streaks than Emerson.
The company has achieved such an exceptional dividend growth record thanks to its strong business model, decent resilience to downturns, and somewhat conservative payout ratio. These factors provide a margin of safety during recessions.
In this article, we’ll review Emerson’s prospects as an investment today.
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, providing 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, which generates ~65% of the total revenue, 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. As this industry is infamous for the dramatic swings of commodity prices, Emerson is highly sensitive to the industry cycles.
This helps explain the 34% decrease in Emerson’s earnings per share from 2014-2016, 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.
Fortunately, business conditions have improved this year as the global economy has recovered from the pandemic.
Source: Investor Presentation
Emerson reported third-quarter earnings on August 2, 2023, and the results were good. Adjusted earnings-per-share came to $1.29, beating estimates by $0.19. Revenue was 13.5% higher year-over-year to $3.9 billion and was $60 million higher than expectations.
Pretax operating margin was 19.3% of revenue, up 840 basis points year-over-year. Guidance was updated to net sales of +10.5% this year, which is higher than prior guidance. Adjusted earnings-per-share is expected to be $4.40 to $4.45. We see $4.45 in earnings-per-share for this year.
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 oil and gas industry, which is highly cyclical. 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 7.0% 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
As Emerson has served its customers for several decades, it has built great expertise in the markets it serves. In addition, thanks to its large scale and its 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:
- 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)
Emerson got through the Great Recession with just one year of declining earnings per share. That performance was 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 the economic cycles, it is impressive that Emerson has grown its dividend for 66 consecutive years. The exceptional dividend record can be attributed to the aforementioned decent resilience of the company during downturns.
Another reason is the conservative payout ratio, which should come in at about 46% for this year, which provides a material margin of safety to the dividend during economic downturns.
Valuation & Expected Returns
Based on the expected adjusted EPS of $4.45 for fiscal 2023, Emerson is currently trading at just 21.7 times its expected EPS. This earnings multiple is much higher than our estimate of fair value at 19 times earnings. That implies a weak ~-2.5% annual return from a higher valuation should it reach 19 times earnings again.
With 7% expected annual earnings-per-share growth, a 2.1% dividend yield, and a -2.5% annualized expansion of the price-to-earnings ratio, we expect Emerson stock to generate a 6.6% average annual return over the next five years.
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 strong dividend yield of the stock and its reliable dividend growth renders the stock suitable for some income-oriented investors.
We see the stock as overvalued today by a wide margin but with renewed growth and a strong earnings base. The 6.6%+ projected annual returns are not good enough to earn a buy rating for Emerson. Thus, we rate the stock as a hold as the current price level.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~400 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta
- The Complete List of Russell 2000 Stocks
- The Complete List of NASDAQ-100 Stocks