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Emerson (NYSE:EMR) is a global diversified manufacturer operating five main businesses:

  1. Process Management: Intelligent control systems, measurement instruments, etc.
  2. Industrial Automation: Automation systems, mechanical and electrical drives, power generation technologies.
  3. Network Power: Power backup systems, precision cooling, connectivity technologies.
  4. Climate Technologies: Heating, air conditioning, and refrigeration solutions.
  5. Commerical and Residential Solutions: Construction and maintenance tools, home and commercial storage, appliance solutions.

(click to enlarge)EMR Chart

EMR data by YCharts

Emerson currently trades at $44.72 per share with a dividend yield of 3.58%. Here is the ten-year dividend history.

YearDividendGrowth
2002$0.781.62%
2003$0.791.28%
2004$0.801.27%
2005$0.833.75%
2006$0.897.23%
2007$1.0517.98%
2008$1.2014.29%
2009$1.3210.00%
2010$1.341.52%
2011$1.382.99%
2012$1.60*15.94%

* Estimate based on $0.40 quarterly dividend

Since 2006 the dividend has grown at an average rate of 10%, with a hefty increase at the end of 2011. I'll calculate the payout ratio as a percentage of the free cash flow. The results are shown below.

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$1,43484145.74%
2003$1,39484147.66%
2004$1,81684437.18%
2005$1,66983641.57%
2006$1,91182438.38%
2007$2,33580336.11%
2008$2,57978936.71%
2009$2,55575939.21%
2010$2,76878938.20%
2011$2,56875440.24%

The payout ratio has been consistently around 40% for the last decade, which allows room for the dividend to grow. Emerson has stated that its first priority is to return cash to the shareholders, and is committed to 40%-50% of free cash flow going to dividends and $600 million in share buybacks per year (Presentation - PDF).

Valuation

I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 8% next year, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.

YearDividend Growth Rate
20138%
20147.75%
20157.5%
20167.25%
20177%
20186.75%
20196.5%
20206.25%
20216%
20225.75%
20235.5%
20245.25%
20255%
20264.75%
20274.5%
20284.25%
20294%
20303.75%
20313.5%
20323.25%

For reference, the average analyst estimate for 5-year earnings growth is 11.22%. Using the above parameters I arrive at a fair value of $48.43 per share.

Conclusion

Emerson currently trades at $44.72, about $4 lower than my fair value estimate. Being a well diversified company with exposure to a large number of markets combined with the stated commitment to returning cash to shareholders makes Emerson a great buy for dividend investors. Emerson stock has dropped from around $53 per share earlier this year and now offers a great entry point. Emerson would make a fantastic addition to any dividend-focused portfolio.

Source: Emerson Is A Great Dividend Stock