Emerson Electric, A Classic Income Stock

| About: Emerson Electric (EMR)

Summary

When describing Emerson Electric as basic industry, put the emphasis on the word "basic."

Profitability here is strong, but lately, not as strong as it's been due to a large portion of customers being in the energy sector.

Low oil prices have dampened spending in that area, but better times seem likely going forward.

Meanwhile the yield is good and dividend coverage is great, making EMR a classic equity income play.

THIS IS A REPRINT OF AN ARTICLE THAT INITIALLY APPEARED ON FORBES.COM

Emerson Electric (NYSE: EMR) is a company I first encountered in 1980 when I, then an entry-level analyst at Value Line, was assigned to write it up. I succeeded in having it re-assigned as soon as they hired another analyst more junior than me (the very next quarterly publication cycle) because the stock was so darned boring and with what seemed like a gazillion products all related to basic industry, largely incomprehensible. How's that for rookie stupidity!

For Starters . . .

The stock has a dividend yield of about 3.36%.

That's pretty decent by admittedly stingy contemporary standards - compare yields on such mainstream equity-income ETFs as 2.12% for Vanguard Dividend Appreciation ETF (NYSE: VIG); 3.05% for iShares Select Dividend ETF (NYSE: DVY); 2.89% for Schwab US Dividend Equity ETF (NYSE: SCHD); 2.56% for PowerShares Dividend Achievers (NYSE: PFM); or 2.14% for ProShares S&P 500 Dividend Aristocrats (NYSE: NOBL).

My current interest in EMR has nothing to do with a sudden desire to reminisce nor is it based on the company's having become more newsworthy. As usual, it's the fundamental data that tells me what to be interested in. EMR currently appears my Portfolio123 Equity Income Portfolio, which can be tracked for free on Portfolio123. It also appears in a premium Portfolio123 model to which I subscribe, the SMS Dividend Portfolio created by Steve Auger.

Growing Up

Today, I understand that cool stories, things that trend, etc., have absolutely nothing to do with investment merit and may almost suggest stocks from which you should run rather than buy. Boring is good. Profits trump headlines.

That said, things are different today not just for me (I'm older and hopefully wiser) but also for EMR. It's still not the most exciting firm around, but it has been more newsworthy (at least in terms of what makes for news in the investment world) and not always for the greatest of reasons.

CEO David Farr came aboard in 2000 and did things for which top execs tend to get applauded, such as eliminating under-performing businesses, pursuing emerging markets, not to mention paying healthy dividends and buying back a lot of stock. But in the mid- to late-2000s, the company chased after a supposedly hot area, network power. That didn't fare so well and that operation was sold. And then, something happened regarding which EMR had no control; oil prices plummeted, thus posing a nasty headwind in the company's largest target market.

The Present

Like many companies sharing similar circumstances, EMR has been working aggressively to make its operations cost efficient and that's helping quite a bit in mitigating the impact of weak sales (due, largely, to still lackluster energy prices which impacts EMR's largest customer group). The company is also working to broaden its presence in its areas by making additive, or bolt-on, acquisitions (i.e., but not necessarily acquisitions that bring it into completely new fields). The pending purchase of Pentair's (NYSE:PNR) valves-and-controls business is an example of this.

It was never easy to articulate in a bullet-point manner the business themes that characterize EMR, but it does seem more doable now than when I wrote up the company in 1980. Generally speaking, with emphasis on the word "generally," I'll suggest this firm is about industrial fluid control (actual movement control, remote monitoring and management, etc.) and internal climate control (mainly buildings but, also, even things like refrigerated trucks).

The first quarter of fiscal 2017 (started Oct. 1) was probably another difficult one. But cost efficiencies and economic improvement, along with recovery in oil prices, should lead to better days ahead. Longer term, infrastructure spending should be a plus, particularly as emerging markets develop.

Perspective

While many care deeply about quarterly tallies, here are things that impress me more, particularly for a stock that catches my eye as a yield play, where the main question, right up there with yield, is the company's ability to pay and hopefully grow its dividend.

Table 1 (mill. $)

The key Inflows:

Important Outflows

Surplus

Cash Fr. Oper.

Divided

CapEx

Acquisitions

2010

3292

1009

524

2843

-1084

2011

3233

1039

647

232

1315

2012

3053

1171

665

187

1030

2013

3659

1181

678

19

1771

2014

3692

1210

651

610

1221

2015

2529

1269

588

324

348

2016

2881

1227

447

132

1075

Data from S&P Compustat via Portfolio123.com and reflects Compustat standardization protocols

The big outflow in 2010 was caused by a network-power acquisition, as noted above. Since then, the company has had surpluses, not just in terms of cash needed to cover the dividend, but also in the sort of discretionary area of capital spending and the absolutely positively discretionary area of acquisitions. The latter can be expected to occasionally make for additional net outflows (insofar as these particular items are counted) but as noted, this is entirely a matter of management choice and should not be expected to threaten the dividend. In fact, during the times depicted above, revenues trended generally downward due to oil-patch and macroeconomic challenges, and still over that time span, the company bought back approximately $7 billion of equity.

EMR is more leveraged than the median of firms in its industry (total debt to equity of 0.88 versus 0.36), but is in line with the S&P 500's 0.85 ratio). As to serviceability of debt, EMR's trailing-12-month interest coverage ratio is very strong at 12.62, versus industry and S&P 500 medians of 3.02 and 7.59.

In terms of basic profitability, EMR shines, even now, despite its challenges.

Table 2

EMR

Medians

Industry

S&P 500

% Return on Assets - TTM

7.26

2.18

4.73

% Return on Assets - 5Y Avg.

7.88

2.77

5.24

% Return on Equity - TTM

20.32

4.46

14.40

% Return on Equity - 5Y Avg.

19.52

8.07

14.86

Data from S&P Compustat via Portfolio123.com and reflects Compustat standardization protocols; ratios based on Portfolio123 protocols. TTM = trailing 12 months

Conclusion

In terms of conventional valuation metrics, EMR shares do not seem cheap. There may be something to the idea of a Trumpanomics play, or anticipation of better times ahead in energy. Ultimately, though, no P/E, etc., is inherently good or bad apart from the fundamental characteristics of the company, and in the case of EMR those fundamentals are quite strong despite recent challenges. And for income seekers, once expectations regarding dividend security are established, it's all about the yield, and here, the yield is pretty good.

Disclosure: I am/we are long EMR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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