Tuesday, March 10, 2015

Emerson Electric Co. (EMR) Dividend Stock Analysis

Emerson Electric Co. Dividend Stock Analysis

Emerson Electric Co. is listed on the New York stock exchange (NYSE) with ticker EMR.

Company Background (From Yahoo! Finance):

Emerson Electric Co. provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. The Process Management segment offers products and technology, and engineering, project management, and consulting services for precision measurement, control, monitoring, asset optimization, and safety and reliability of oil and gas reservoirs and plants. 
This segment serves end markets in oil and gas, refining, chemicals, power generation, pharmaceuticals, food and beverages, pulp and paper, metals and mining, and municipal water supplies. The Industrial Automation segment offers integrated manufacturing solutions for products, including motors, drives, power generating alternators, fluid controls, electrical distribution devices, and materials joining equipment. The Network Power segment designs, manufactures, installs, and maintains products that offer electric power conditioning, power reliability, and environmental control for telecommunications networks, data centers, and other critical applications, as well as offers comprehensive data center infrastructure management solutions. The Climate Technologies segment provides products and services for various areas of the climate control industry, including residential heating and cooling, commercial air conditioning, and commercial and industrial refrigeration. The Commercial & Residential Solutions segment offers a range of professional and do-it-yourself tools; residential, commercial, healthcare, and food service storage solutions; and appliance solutions. The company was formerly known as The Emerson Electric Manufacturing Company and changed its name to Emerson Electric Co. in 2000. Emerson Electric Co. was founded in 1890 and is headquartered in St. Louis, Missouri.


Current Yield and Dividend Growth:
Emerson currently pays a dividend of USD 0.47 per quarter for a USD 1.88 annual dividend. At the close of market on Friday, March 6th EMR’s price per share was USD 56.56. This gives the stock a current dividend yield of 3.32%. Normally I look for a dividend yield of at least 3%, so I will be satisfied with this dividend yield from EMR. In 2005, Emerson paid an annual dividend amount of USD 0.83 per share. In the last ten years, the dividend trend has risen steadily and in 2014 the dividend was USD 1.72 per share. Emerson has increased its dividend now 58 years in a row, so EMR is the dividend champions (U.S. Dividend Champions by David Fish). Dividend growth rates for 1, 3, 5 and 10 years are 6.0, 7.0, 5.8 and 8.1. Emerson now pays dividends of $0.47 per share in March, June, September and December.

EPS Growth:
Emerson's EPS has grown an average of 7.36% over the past 10 years, 5.95% in the past five years and -2.51% in the past three years. Last year the growth of EPS was decent 9.78%. Emerson's EPS of development in the past years don’t seem to be very good. Analyst estimates for 5 year earnings growth rate per annum are 8.26% (http://finance.yahoo.com/q/ae?s=EMR+Analyst+Estimates). It's in my opinion a bit too optimistic estimate and if that will happen, investors can be very satisfied.

Net Income:
Emerson's net income has increased by an average of 5.5% over the past 10 years, 4.49% in the past five years and -4.69% in the past three years. Last year net income grew 7.14%. The net income trend looks similar to the EPS trend.

Revenue Growth:
Emerson's revenue has increased 4.62% over the past 10 years, 3.25% in the past five years and 0.43% in the past three years. Last year revenue decreased 0.54%. The development of revenue looks worse than the development of EPS and net income.

Outstanding Shares:
The past 10 years, Emerson's amount of shares has decreased with the exception of the year 2009, when there was a slight rise. I like this, because less shares outstanding, my shares are giving me a bigger portion of the earnings.

Payout Ratio:
Emerson's dividend payout ratio has been in the past 10 years on average 49.46%. Last 12 month period, the payout ratio was 55.80%. This means that Emerson was distributed around 50% of profits to shareholders and keeping 50% of profits to grow the company. This payout ratio is moderate and I don’t believe Emerson should have any trouble maintaining dividend growth in the future.

Emerson's ROE has been around 20% over the past 10 years, which is good for me.

Net Profit to long term debt:
This number tells me how many years it will take to pay off the current long term debt of the company by using all net profit in it. I would like to see this ratio to be less than 5, because in that case the company is able to pay for all long-term debt for less than five years and on my opinion then the company doesn´t have too much debt. Emerson's long term debt had been clearly below 5 times net profit in the past 10 years. In recent years, it had been between 1.58 and 2.32. End of the year 2014, it was 1.66.


To find out share fair value, I use Graham Number, Average P/E Ratio, Average Dividend Yield, Average P/S Ratio, Discounted Cash Flow and Dividend Discount Model. For more info on those methods, click here.

Graham Number:
The Graham Number valuation method was conceived by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value. Emerson has earned $3.15 per share in the last twelve months and has a current book value per share of $13.88. The Graham Number is calculated to be $31.36, suggesting that EMR is overvalued about by 80%.

Average P/E Ratio:
Emerson`s 5-year average P/E is 17.76 and the 10-year average P/E is 21.37. By calculating using estimated EPS $3.79 for year 2015 we get a fair value of $67.32 (based on 5-year average) and $80.99 (based on 10-year average). If I calculate by using a 5-year average low P/E (14.58) I get a fair value of $55.26 and with a 10-year average low P/E (16.93) fair value is $64.18.

Average Dividend Yield:
Emerson`s current annual dividend is $1.88. At the close of market on Friday, March 6th EMR’s price per share was $56.56. This gives the stock a current dividend yield of 3.32%. EMR’s average dividend yield over the past five years was 3.04% and past ten years was 2.51%. Based on the current annual payout of $1.88, that gives us a fair value of $61.81 and $74.96 over the 5- and 10-year period, respectively. By calculating with the 5-year average high dividend yield (3.78%) we get fair value of $49.69 and with the 10-year average high dividend yield (3.23%) fair value is $58.24.

Average P/S Ratio:
Emerson`s current P/S ratio is 1.67 with revenue estimates for the year 2015 (23.7B). Emerson`s 5-year average P/S is 1.59 and the 10-year average P/S is 1.91. By calculating using the estimated revenue for the year 2015 we get a fair value of $53.93 (based on 5-year average) and $64.68 (based on 10-year average). If I calculate by using a 5-year average low P/S (1.31) I get a fair value of $44.17 and with a 10-year average low P/S (1.51) fair value is $51.02.

Discounted Cash Flow:
Analyst estimates for 5 year earnings growth rate per annum is 8.26%. I will use in my calculation 60% of that, which are 4.96%. Then I assume that continue growth after 5 years will be 3%. I use discount rate 10% and EPS $3.15. Total I calculate for next 30 years. That will give me share fair value $43.73.

Discount Rates8%9%10%11%12%
NPV of Future EPS$54.31$48.57$43.73$39.63$36.12

Dividend Discount Model:
Emerson`s current annual dividend is $1.88. I assume that Emerson will be able to grow dividends for the next 5 years at the lowest of the 1, 3, 5 year growth rate or 15%. In this case that would be 5.8%. Then I assume that after 5 years grow rate will be 5%. To calculate the value I used a discount rate of 10%. Total I calculate again for next 30 years. That will give me share fair value $31.18.

Discount Rate8%9%10%11%12%
NPV of Future Dividends$39.67$35.04$31.18$27.94$25.20

Future Price:
Emerson has EPS $3.15 (ttm). When I calculate Emerson`s future price with the analyst estimate for 5 years EPS growth (8.26%) and using the 5-year average low P/E, I get a price $68.23. That would give about 14% upside for EMR´s current price. By calculating using the 5-year average P/E ratio, I get a price $83.11.

Emerson`s growth development in past years looks okay for me, albeit revenue hasn't grown during the past years. In the last 10 years there are two years, when EMR’s EPS went down (2009 and 2012). Emerson`s payout ratio is now 55.80%, it’s higher than 10-year average payout ratio 49.46%. In any case, I believe there will be some reserve for dividend increases in the future. Net profit to long term debt is clearly below 5, what I normally like to see. Based on my value calculation, EMR is now trading higher as its 5-year average low P/E ratio (14.58) and also higher as its 5-year average P/E ratio (17.76). When I look the 5-year average dividend yield (3.04%), I see that EMR is now trading below that price. To compare 5-year average P/S ratio (1.59), I see that, EMR is now trading over that price. My calculation of discounted cash flow gives price $43.76 for the net present value, meaning that EMR is overvalued by 29%. Based on the dividend discount model, Emerson is worth $31.18, meaning it's currently overvalued by 81%. Overall, I feel that Emerson is fairly valued at current levels. I will keep an eye on Emerson and if the stock price will stay at these levels, I hope to be able to buy some EMR to my portfolio.

Disclosure:  I don't own any shares of EMR.

Click here to see my portfolio holdings.


  1. Thanks for your analysis of EMR...we own shares in EMR and are down roughly 6% from our cost basis. Overall, many utility stocks are down so as a long term investor, I am not worried yet. You analysis was definitely not music to my ears so I guess we'll keep our eye on the stock. Who know, it the price is discounted enough, we may just seize the opportunity to average down our cost basis. :)

    Thanks for sharing. AFFJ

  2. The world will have to burst into flames for EMR to get to $31 a share...

  3. I agree with Anonymous - we're unlikely to see $31/share, however, I do believe that it could go down a fair bit to somewhere around $46 or so. I'd love to pick up some Emerson if it does drop a few dollars below the $50 mark. Need to look at resistance levels below that amount to get a guess on where it could be realistically pushed down to.

    Great analysis!


  4. The reason behind dismal revenue growth is that the mgmt is getting rid of low ROE business. The underlying business is growing quite nicely and the bottom line is growing constantly due to focus on high margin business. Based on my own analysis, EMR is around 5%-10% undervalued when compared to historical valuations. EMR is definitely a buy at current price.