This is the seventh in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying 5 year dividend growth rates from 1% to 17%. I was surprised to find all kinds of companies in the list like Johnson and Johnson (NYSE:JNJ) a large cap company with dividend growth of 7% and some other companies with dividend growth of less than 1%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Emerson Electric Co. (NYSE:EMR) and why it's a dividend growth income investment that has increased its dividend for 59 years making it a dividend King. Emerson Electric Co. is engaged in offering technology and engineering together that provides solutions for customers in industrial, commercial, and consumer markets around the world. The company operates through five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Emerson Electric Co. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Emerson Electric Co. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Emerson Electric Co. passes 9 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Emerson Electric Co. is a large-cap company with a capitalization of $34.5 billion. The size of Emerson Electric Co. steady cash flow of $3.4 Billion from its business allows it to have the staying power to pay its above average dividend and have plenty of cash for stock buybacks and company expansion. EMR is the largest company in the Electric and Components and Equipment sub industry by far and has the muscle to handle any problems that occur in their business.
Emerson Electric Co. has a dividend yield of 3.6% which is above average for the market. The dividend has been increased for 59 years and its dividend is very safe. The payout ratio average over the last 5 years is 51% which leaves plenty of cash to grow the business and for stock buybacks. Emerson Electric Co. is therefore a good choice for the dividend growth income investor. After paying the above average dividend there is still cash remaining for business expansion.
Emerson Electric Co. yearly cash flow is good at $3.4 Billion which leaves enough cash after paying its dividend for business expansion and stock buy backs. For 2016 Emerson Electric Co. is expected to buy back $1.0 Billion of its stock.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Emerson Electric Co. has a CAGR of 6% (from S&P Capital IQ) just meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth $12,000 today (from S&P Capital IQ). This makes Emerson Electric Co. a fair investment for the dividend growth income investor but a poor choice for the total return investor.
For Emerson Electric Co. S&P Capital IQ has a three star rating or hold with a one year price target of $55.00. This makes Emerson Electric Co. fairly priced at present but with projected business growth of 6% over the next year. In the long term Emerson Electric Co. above average dividend and its growing business in the electric components business is a good choice for the dividend growth income investor in a strong growing economy.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Emerson Electric Co. had much worst total return than the Dow baseline in my 41.5 month test period. I chose the 41.5 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. This below average total return of 14.11% for Emerson Electric Co. compared to the DOW baseline of 34.89% does not make it appropriate for the total return investor. Emerson Electric Co. pretty much followers the economy over the test period and has a dividend growth of 6.76% over the past 5 years. In 2013 a good year EMR beat the DOW total return at 30.13% compared to the DOW base of 27%. Year to date total return is 8.97% ahead of the DOW small gain so far this year. The dividend is above average at 3.6% and has been increased for 59 years making the company a dividend King.
DOW's 41.5 month total return baseline is 34.89%
41.5 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Emerson Electric Co.
Last Quarter's Earnings
For the last quarter Emerson Electric Co. reported earnings on May 3, 2016 that beat expected earnings at $0.66 compared to last year at $0.65 and expected at $0.63. Expected revenue was inline and total revenue decreased by 9.0% year over year to $4.9 Billion. This was a fair report showing the decreased revenues while still making the earnings goal. This leaves enough cash remaining after paying the $0.475 dividend for expansion. Earnings for the next quarter will be released August 2, 2016 and are expected to be at $0.85/share compared to last year at $0.84/share a slight increase. From the last earnings call management projected yearly earnings at $3.05 -$ 3.25, not exciting. They also said they have a headwind of due to the strong dollar and weakness in the oil and gas sector.
Company Business Overview
Emerson Electric Co. is engaged in offering technology and engineering together that provides solutions for customers in industrial, commercial, and consumer markets around the world. The company operates through five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. The Process Management segment provides measurement, control and diagnostic capabilities for automated industrial processes. The Industrial Automation segment provides integrated manufacturing solutions to its customers at the source of manufacturing their own products. The Network Power segment designs, manufactures, installs and maintains products providing grid-to-chip electric power conditioning. The Climate Technologies segment provides products and services for the climate control industry. The Company's Commercial & Residential Solutions segment offers a range of tools, storage products and appliance solutions. The problem with the business is the drag from the strong dollar and the companies correlation to the slowly increasing economy which in effect directly drives earnings, EMR likes a strong growing economy. Emerson Electric Co. business is a steady growing company that should be considered for the dividend Growth income investor that can navigate the cyclical nature of the business.
Takeaways and Recent Portfolio Changes
Emerson Electric Co. is a fair choice for the dividend growth income investor increasing its dividend for 59 years and growing the dividend in the future but is fairly priced right now. Emerson Electric Co. missed total return compared to the Dow average and is a poor choice for the total return growth investor until the economy starts to grow strongly. The business is growing at 6% CAGR and Emerson Electric Co. is a electric parts and service company that does suffer the swings of most other companies with the economy. The Good Business Portfolio guidelines does not have an open slot right now but will not consider Emerson Electric Co. because of its cyclical nature and poor total return when an open position occurs. If you don't already have a position in the electric components sector EMR may be worth a position for your dividend growth income segment if you can accept and navigate the cyclical nature of its business. I am in retirement and need a more stable business to invest in like Johnson and Johnson.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold July 45's. If the premium gets to 20% of the sold premium price I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 8.0% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Eaton Vance Enhanced Equity Fund II (NYSE:EOS) is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.9% of the portfolio, therefore BA and JNJ are now in trim position with Altria Group Inc., Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen. It is estimated that 15 787 planes ("All Things 787" web site) can be delivered in June exceeding the goal of 12 planes.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, DIS, MO, EOS, OHI.
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.