Thursday, September 25, 2014

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 premium to all four valuations above. The stock is trading at a 42.0% premium to its calculated fair value of $45.78. 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 two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 58 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 $166 is below the $500 target I look for in a stock that has increased dividends as long as EMR has. If EMR grows its dividend at 3.7% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.08%.

Memberships and Peers: EMR is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Espey Manufacturing & Electronics Corp. (ESP) with a 4.0% yield, ABB Ltd. (ABB) with a 3.4% yield and Regal Beloit Corporation (RBC) with a 1.3% yield.

Conclusion: EMR did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks EMR as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $50.28 before EMR's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 58 years of consecutive dividend increases. At that price the stock would yield 3.4%.

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 6.3%. This dividend growth rate is higher than the 3.7% 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. Management projects 2014 E.P.S. to grow by 4% to 7% driven by slightly higher operating margins. Order rates, including those in Europe and Asia, should have bottomed out with increased construction spending in North America, along with global energy investments.

In its most recent earnings announcement, the company reported slower than expected growth, with financial performance trending to the low end of the previously communicated guidance ranges. Backlogs are at a record level, up more than 20% driven by underlying orders growth of 5%. Margin expansion was strong as portfolio changes and operational efficiencies more than offset growth investment. Earnings per share of $1.03 increased 6%, cash generations remained strong.

The company's advantages include globally branded platforms, new products in the pipeline and it enjoys a strong balance sheet with a low free cash flow payout and low debt to total capital. The stock is currently trading well above my calculated fair value price of $45.78, so for now I will not be 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 (2.5% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: [EMR] [ESP] [ABB] [RBC]