- Oppenheimer recently upgraded Emerson from perform to outperform and gave a price target of $77 per share.
- Emerson’s future prospects are highly correlated with global economic activities. The increased spending on infrastructure and energy efficiency is correlated with the company’s revenues.
- Emerson has enacted several initiatives like acquisitions aimed at capitalizing on the growing needs of emerging markets particularly China.
- The higher capital investment in the oil and gas industry serves to strengthen the revenue base for the process management segment of the company.
Emerson Electric (NYSE:EMR) has been consecutively increasing its dividend for 57 years at a CAGR of 11 percent. With a payout of 59.3 percent, the company is currently trading at a dividend yield of 2.53%. The decent returns coupled with the consistency of these returns have been the attributes that have attracted investors. Although historical performance does not guarantee future performance it does set the benchmark. Let's discuss whether the company will be able to maintain its dividends and share buybacks standards.
Emerson is one of the companies whose long term prospects are deeply linked with global economic conditions. With the rebound in global economic activities, I believe that Emerson is well positioned to benefit from the global trends of higher infrastructure spending and improving energy efficiency. In this article I will be focusing on the global economic activities with special reference to Emerson's position.
Emerging Markets Continue To Lead
Emerson has been busy in developing its business in emerging markets. With an aggressive development strategy, emerging markets have now become a major part of its business and crucial for long term growth. This is because the economic growth and development in the emerging markets outpace the growth in developed markets.
Source: Company's Investor Conference
To further capitalize on the pace of growth of the emerging markets while expanding horizons of its business, Emerson has recently taken certain initiatives that I believe are worth mentioning. The company recently announced it was completing its acquisition of EGS Electrical. With the acquisition, Emerson will have a share of the growth opportunities that exist in the oil, gas, and chemical industries. The transaction will be slightly helpful to earnings in 2014 as it will be generating $500 million in annual revenues.
The emerging markets are increasingly investing in infrastructure to support the needs of modern economy. With the increased spending in infrastructure the company stands to benefit from the consistent adoption of central air conditioning particularly in Asia.
Similarly, in North America the company's residential segment, particularly air conditioning, professional tools, and the food and water disposal businesses are in good shape to benefit from increasing investments. Going forward, the company is optimistic about the shale oil and gas production and has identified it as a strong area of investment for process management's customer base.
Source: Investor Conference
The figure above is an overview of major markets served by the process management segment. Geographically, North America is the highest contributor in the sales as it accounted for 37% of the total segment's sales.
Going forward, the company expects that the capital investment in the North America unconventional oil and gas industry will reach over $1.5 trillion by the end of 2022 with $1000 billion in shale exploration and production. With higher capital investment in the oil and gas industry the company expects revenue from the process management segment to grow by 7% - 8% in 2014.
Emerson has enacted several cost cutting and restructuring initiatives that are expected to be beneficial for the company in the long term. For 2013, the company improved the GP margin by 70 basis points compared to its 2010 levels. Similarly, going forward, process management remains at high levels with steady and material drivers for sustainable growth.
The case of Emerson is not a very compelling one when it comes to screening high growth stocks because Emerson is more of the slow and steady type. That is because its products are not only important to economy but also crucial to several major markets.
Moreover, the company is well positioned in the emerging markets and has been enacting initiatives in the form of acquisitions and ventures to widen the horizons of its operations. By dealing with the products that are crucial to the economy the company has generated strong cash flows and has been rewarding investors with steady dividend growth.
The company has had a fabulous history of increasing dividends for almost 6 decades. The payout of 59.3% represents an annualized dividend yield of 2.53%. Emerson Electric has a steady business that has been able to grow revenues every year since 2009 and is expected to continue the same trend. Therefore, I recommend buying the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.