Updated on October 29th, 2021 by Bob Ciura
The Dividend Kings consist of companies that have raised their dividends for at least 50 years in a row. Many of the companies have turned into huge multinational corporations over the decades, but not all of them. You can see the full list of all 32 Dividend Kings here.
We created a full list of all Dividend Kings, along with 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 64 consecutive years and thus it has 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, its decent resilience to downturns and its somewhat conservative payout ratio.
These factors provide a margin of safety during recessions.
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 ~63% of the total revenue, offers industrial equipment and software to the oil and gas industry, refining, power generation as well as other industries.
The Commercial & Residential Solutions segment, which generates the remaining 37% 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 last year, 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 4th, 2021, beating expectations on both the top and bottom lines.
The company said it is seeing continued strength in its residential businesses, as well as improvements in commercial and industrial end markets. Adjusted earnings–per–share came to $1.09, above prior guidance and consensus from analysts.
The gains came from ongoing cost reductions and higher volumes combining to produce both higher revenue and better profit margins during the quarter.
Emerson has pursued growth by expanding its customer base but also by acquiring many companies. A fairly recent example was the acquisition of Progea Group, a provider of industrial Internet of Things, plant analytics and other applications, which helped Emerson offer its industrial customers an integrated package of plant control.
A more recent example of Emerson’s willingness to pursue big deals was the October 11th announcement that Emerson will combine its industrial software businesses along with $6 billion in cash, to Aspen Technology (AZPN).
The deal will create a “new” AspenTech, of which Emerson will own 55% moving forward.
Source: Investor Presentation
This deal should add to Emerson’s long-term growth. 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 it can also erase many years of growth during a severe downturn.
Nevertheless, thanks to its recent acquisitions and the low comparison base formed this year due to the pandemic, we expect Emerson to grow its earnings per share at a 6.0% 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 decline in its earnings per share. That performance was certainly impressive.
Emerson was more heavily affected in 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 have not yet recovered to the level of 2014. With that said, we do expect adjusted earnings-per-share to eclipse the 2014 high in fiscal 2021.
Given its sensitivity to the economic cycles, it is impressive that Emerson has grown its dividend for 63 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 slightly below 50% for fiscal 2021, which provides a material margin of safety to the dividend during economic downturns.
Valuation & Expected Returns
Based on expected adjusted EPS of $4.10 for fiscal 2021, Emerson is currently trading at 23.6 times its expected EPS. This earnings multiple is higher than the average price-to-earnings ratio of 18.7 of the stock over the last decade.
Due to the cyclical nature of Emerson’s businesses, we believe that a fair earnings multiple for the stock is around 19.0. This means that the stock appears to be overvalued right now.
If the stock reverts to our assumed fair valuation level over the next five years, it will incur a -4.2% annualized drag on its returns.
With 6% expected annual earnings-per-share growth, the 2.1% dividend yield and a -4.2% annualized contraction of the price-to-earnings ratio, we expect Emerson stock to generate a 3.9% 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 downturn in the energy sector. The decent dividend yield of the stock and its reliable dividend growth render the stock suitable for some income-oriented investors.
However, it is critical to note that the stock has retraced all its pandemic-driven losses (and then some) and thus it is standing at a rich valuation level right now. As a result, we expect fairly low returns of just 3.9% annually over the next five years.
To conclude, investors should wait for a meaningful correction of the stock before purchasing Emerson.