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.

### Analysis

**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.

**ROE:**

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.

### Value

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 Rates | 8% | 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 Rate | 8% | 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.

**Conclusion:**

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.

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. :)

ReplyDeleteThanks for sharing. AFFJ

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

ReplyDeleteI 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.

ReplyDeleteGreat analysis!

Cheers

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.

ReplyDelete