Tuesday, March 1, 2016

Emerson Electric Co. (EMR) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Emerson Electric Co. (EMR). Below are some highlights from the above linked analysis:

Company Description: Emerson Electric Co. designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial and consumer markets around the world.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

EMR is trading at a discount to 1.) and 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 11.3% premium to its calculated fair value of $44.37. EMR did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

EMR earned one Star in this section for 3.) above, having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 60 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $436 is below the $500 target I look for in a stock that has increased dividends as long as EMR has. The stock's current yield of 3.85% exceeds the 2.67% estimated 20-year average MMA rate.

Peers: The company's peer group includes: Espey Manufacturing & Electronics Corp. (ESP) with a 4.0% yield, ABB Ltd. (ABB) with a 1.0% yield and Regal Beloit Corporation (RBC) with a 1.7% yield.

Conclusion: EMR did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks EMR as a 1-Star Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $47.18 before EMR's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 60 years of consecutive dividend increases. At that price the stock would yield 4.0%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 1.6%. This dividend growth rate is higher than the 1.1% used in this analysis, thus providing no margin of safety. EMR has a risk rating of 1.50 which classifies it as a Low risk stock.

EMR holds a broad portfolio of industrial businesses with a strong competitive positions. The company has a reputation for providing consistent returns to its investors. The company's advantages include globally branded platforms, new products in the pipeline. Its free cash flow payout of 69% and debt to total capital of 50% are both slightly above my preferred maximums. The stock is currently trading above my calculated fair value price of $44.37, so I will wait for a more opportune time before significantly adding to my position.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in EMR (2.4% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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