High-Yielding Emerson Electric Has Lagged The S&P 500

Aug.18.14 | About: Emerson Electric (EMR)

Summary

The stock should be a buy shortly after 2015 earnings estimates stop decreasing.

I anticipate the dividend to be increased during the upcoming quarter.

The high risk/reward ratio doesn't make me a buyer of the shares right now.

The last time I analyzed Emerson Electric Co. (NYSE:EMR) I stated, "Due to the fair valuation on next year's earnings, low dividend yield, and expensive valuation on growth potential I'm not going to be buying a position at this price." Since the article was published the stock has decreased 1.44% versus the 7.05% gain the S&P 500 (NYSEARCA:SPY) posted. Emerson is a diversified global technology company which is engaged in designing and supplying products and technology, and delivering engineering services and solutions in the industrial and commercial worlds.

On August 5, 2014, the company reported third quarter earnings of $1.03 per share, which missed the consensus of analysts' estimates by $0.03. In the past year, the company's stock is up 3.77% excluding dividends (up 6.38% including dividends) and is losing to the S&P 500, which has gained 18.87% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 0.94% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the industrial goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 17.64, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.31 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.54), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 11.43%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 11.43%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

16Aug13

60.88

29.7

15.71

3.88

58

2.6

11.38

22Nov13

68

24.55

16.05

4.24

63

2.24

10.95

16Feb14

64.51

23.04

15.30

4.22

63

2.09

11.04

18Aug14

63.5

17.64

15.31

4.11

62

1.54

11.43

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.73% with a payout ratio of 48% of trailing 12-month earnings while sporting return on assets, equity and investment values of 10.3%, 23.8% and 14.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.73% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 57 years at a 5-year dividend growth rate of 6.2%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

16Aug13

2.69

779

6.3

14.3

13.0

22Nov13

2.53

62

8.4

19.2

14.0

16Feb14

2.67

61

8.4

19.2

14.1

18Aug14

2.73

48

10.3

23.8

14.1

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 45.9. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line just crossed above the red line with the divergence bars increasing in height indicating bullish momentum. As for the stock price itself ($63.65), I'm looking at the 20-day simple moving average (currently $63.92) to act as resistance and $61.69 to act as support for a risk/reward ratio which plays out to be -3.08% to 0.42%.

Recent Earnings Results

A couple of weeks ago the company reported net earnings of $728 million or $1.03 per share, which was a 281% increase from the prior quarter. The company blamed a slower economic environment for the year and said it's going to realize the lower end of 2014 guidance of 3% to 5% sales growth, and earnings per share of $3.68 to $3.80. The stock traded down 1.8% the day it reported compared to a 0.97% drop realized in the S&P500.

Conclusion

I fully anticipate the company to increase the dividend the next time it's announced. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and on earnings growth potential as 2015 earnings estimates have decreased 2.6% in the past few months. Financially, the dividend is pretty big, and has a bit more room to grow and financial efficiencies have increased a bit. On a technical basis the risk/reward ratio shows me a bit more risk right now. Because of the high risk/reward ratio I calculate I will not be buying a batch of shares right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long EMR, SPY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.