Welcome to this series where I will be reviewing all the Dividend Kings and providing an overview and valuation calculation on the companies. Dividend Kings are a rare breed of Dividend Growth Companies. These companies have managed to raise their dividend for 50 or more years consecutively. Through all types of market swings, economic trouble, wars, recessions, these companies have seen it all and continue to reward shareholders with rising dividend income.
This week’s entry will focus on:
Emerson Electric Co. (EMR)
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Overview
Emerson Electric Co. is a technology and engineering company that provides a wide range of products and solutions for industrial, commercial and residential customers across the globe.
They operate in two segments, Automation Solutions and Commercial & Residential Solutions.
Automation Solutions offers:
- Measurement and analytical instrumentation
- Industrial valves and equipment
- Process control software and systems
Commercial & Residential Solutions offers:
- Heating and air conditioning products
- System protector and flow control devices
- Thermostats
- Monitoring equipment and electronic controls for gas and electric heating systems
- Gas valves for furnaces and water heaters
- And more
Emerson Electric Co. was incorporated in 1890 and is headquartered in Saint Louis, Missouri.
(Source: Company Website)
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Metrics:
Dividend Amount: $2.06
Dividend Yield: 2.31%
5 Year Dividend CAGR: 1.37%
Dividend Payout Ratio: 43.01%
Years of Dividend Increases: 65 Years
EPS: $4.79
P/E: 16.21
Analyst 5 Year Earnings Growth Estimate: 10.33%
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Valuation:
Current Price: $88.57 (6/01/22)
DCF (10% RRR): $107.70
P/E Mean Reversion:$106.10
Dividend Yield Theory: $75.18
Average of the three: $96.33
Analyst 1 year Price Target: $107.74
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Commentary:
Emerson Electric Co. is a global technology and engineering company with annual combined revenue of almost $19 billion.
The company has grown through acquisitions, with 19 purchases since 2016. These acquisitions and ongoing business have allowed EMR to grow revenue at an average rate of 7% a year over the past 5 years.
The company released their Q2 earnings in early May and as part of their earnings release stated that net sales increased 8% over the previous year. They also increased their guidance for the year as follows:
Net Sales Growth: 8-10%
Operating Cash Flow: $3.6 Billion
Free Cash Flow: $3.0 Billion
GAAP EPS: $4.77-$4.92
EMR has raised its dividend for 65 years, with the current yield at 2.31% and their 5 year dividend CAGR is 1.37%. This dividend CAGR is very low and does not keep up with inflation. The raises are lower than the company’s projected earnings growth rate and the payout ratio is reasonable, so I have concerns with the company’s focus on dividend growth. That said the current dividend appears to be well covered.
The company’s revenue and net income have stagnated over the past 5 years with slight increases and decreases. The stock has grown 49.09% over the past 5 years, compared to the S&P’s return of 67.52%, and has significantly underperformed the index. The past year the stock is down a little less than 10%.
This underperformance seems to have been noticed as one of the top dividend ETFs, SCHD, recently removed EMR from their holdings. SCHD requires the companies it holds to be high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. The company has a Beta of 1.42, which is much higher than the overall market. This Beta is surprising given the nature of their business.
EMR is a stable company, with a long history of growing and paying a reliable dividend. The current price has come down 9.53% this year and appears to be a decent value, showing it is currently undervalued based on two of the valuation methods shown above. The dividend is low and the growth is low but the stock does appear to be a good value at this time. Given the low dividend and dividend growth and stock price historically underperforming the market, this stock does not fit my investment criteria.
Disclosure: I do not own shares of EMR.