2 Industrials With A Good Yield And Less Than 50% Payout

Includes: EMR, ETN
by: Valuematters

If you are looking for exposure to potential economic growth, but want a dividend to go along with it, you should consider Eaton (ETN) and Emerson (EMR). Both of these companies offer a dividend yield of 3.5% or more and a payout ratio of less than 50%. Additionally, in the last economic crisis they kept their dividend fully intact. Both companies offer broad industrial exposure and should benefit from any general economic growth up-tick.

ETN - From the 10-K, the company is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 73,000 employees in over 50 countries and sells products to customers in more than 150 countries.

Eaton recently announced plans to merge with Cooper Industries (CBE), but this is not yet finalized. This is a huge mega-merger, but should give the company the breadth to compete across a broad range of energy and energy saving products. However, mergers of any size, but especially a huge merger like this, are very difficult to integrate and obtain the projected results.

Looking over the past 5 to 10 years ETN is priced relatively cheaply, when using traditional metrics such as price-to-earnings (NYSE:PE), price-to-book (PB), and price-to-sales (PS). However, it isn't the cheapest the stock has ever traded. The company currently trades at a PE of about 10, a PB of 1.7, and a PS of .8. Looking back, it seems over the last 10 years the end of 2008 (as the financial crisis started to take hold) is when ETN traded at its cheapest valuations based on these metrics, with a PE of 7.6, PB of 1.3, and PS of .5.

The company currently has a payout ratio of about 35%, with dividends per share expected to be about $1.52. This also should equate to 470M of dividends, in terms of the actual cash being paid out. If you look at the trough of earnings in 2009, the company wouldn't have $1.52 to pay out, as they earned only about $1.14 per share in 2009. However, free cash flow, which in my opinion is a much better gauge, has ranged from $700M to over $1B annually since 2009 (including 2009), which leaves sufficient room to pay the dividend.

As the company's most recent earnings release indicates, the company could continue to see subdued end market growth and a difficult environment to really accelerate growth. However, if the company can continue to produce significant levels of free cash flow, it should be able to maintain and even grow the dividend. I would expect the shares to not have a lot of room to grow until the earnings and revenue can really see an uptick, so don't buy expecting a meteoric rise (I see this more as a paid to wait situation).

EMR - From the 10-K, Emerson was incorporated in Missouri in 1890, and has grown from a regional manufacturer of electric motors and fans into a diversified global technology company. Emerson designs and supplies products and technology and delivers engineering services and solutions around the world, making it among the largest industrial conglomerates there is. They are organized into 5 business segments, which are Process Management, Industrial Automation, Network Power, Climate Technologies, and Tools and Storage.

Similar to ETN, looking at the traditional metrics of PE, PB, and PS, EMR is relatively cheap, at least as compared to the 10 year historical record. Currently, EMR has a PE of almost 15, a PB of 3.2, and a PS of 1.4. Looking back, these are among the lowest multiplies EMR has traded at over the last 10 years, with the exception of PS, which in 2008 traded at 1.2. The concerns for EMR are similar to ETN, and that is the impact of a lack of global growth. Additionally, being a US company the currency impact of a stronger dollar shouldn't be ignored.

The company currently has a payout ratio of about 47% and a dividend yield of about 3.5%, paying out $1.60 per share of dividends each year. This works out to about $1B of dividends per year being paid. If we were to use 2009 as a trough year we could see the company earned $2.27 of diluted earnings per share. Looking at the cash flow, the company looks to have produced around $2B or more of free cash flow (it would depend a lot on how you include the acquisitions), which should leave plenty of room for dividends. By all metrics EMR seems able to comfortably maintain the dividends, even if there is a big cut to the earnings.


Both of these companies are massive and will be dependent on global growth in order to really take off. However, these are both scenarios where you are getting paid to wait and with a reasonable cushion to maintain the dividend. Of course, each investor needs to decide if they are being paid enough to wait.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This article should not be taken as investment advice, and is for informational purposes only.

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