Emerson Electric Company (EMR) Dividend Stock Analysis

Summary

-Emerson Electric Company (EMR) is a broad technology company that sells necessary products around the world.
-Revenue growth over the past five years has averaged around 6% per year.
-Earnings growth over the past five years has averaged a little over 6% per year.
-Cash flow growth over this same time period has averaged around 7% per year.
-Annual dividend growth has been over 10% during this time period, and the company has increased its dividend for 53 consecutive years.
-Shares look reasonably valued at the current price in my opinion.

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Overview

Emerson Electric Company (symbol EMR) is a Fortune 500 conglomerate technology company based in Missouri. The company was founded 120 years ago and provides a very large array of technology products and services. The company draws 45% of its revenue from the United States, 21% from Europe, 21% from Asia, and 13% from other places of the world. With over 140,000 employees, Emerson uses its technology to help the world run.

Business Segments

The company currently consists of five business segments:

Process Management
Emerson’s largest business segment, Process Management, accounts for 29% of revenue. The Process Management segment provides control systems, monitoring systems, asset optimization, components, and services. Only about one third of the revenue from this particular segment comes from the United States, with the rest being spread out rather equally from Europe, Asia, and the rest of the world. This was Emerson’s most resilient segment in the face of the deep recession.

Network Power
Emerson’s Network Power segment accounts for 25% of revenue. In this segment, Emerson provides power products and solutions for data centers and telecommunications networks. This includes AC power systems, DC power systems, cooling systems, embedded computing and power, and service (including 24-hour service). Only about 40% of the revenue from this particular segment comes from the United States, with Asia accounting for another 32% of this revenue.

Industrial Automation
Emerson’s Industrial Automation segment accounts for 17% of revenue. They provide a variety of automation products for companies, including industrial equipment, power systems, motors and drives, mechanical power transmission, and fluid automation. Revenue from this particular segment comes strongly from Europe and the United States, though Asia and other areas provide revenue as well.

Climate Technologies
Emerson’s Climate Technologies segment accounts for 15% of revenue. Emerson provides compressors, temperature controls and electronics, and sensors, as well as a variety of other products and services, to provide homeowners and businesses with the tools needed for heating, air conditioning, refrigeration, and overall climate control. Slightly over half of the revenue from this particular segment comes from the United States, while the rest is spread out fairly equally around several other parts of the world.

Appliances and Tools
Emerson’s Appliances and Tools segment accounts for 14% of revenue. They produce a variety of products in this segment, ranging from commercial motors to ceiling fans. Over 80% of the revenue from this particular segment comes from within the United States.

Revenue, Earnings, Cash Flow, and Margins

Emerson was hit hard by the recession, as they sell many of their products and services to businesses that encountered severe financial troubles. The company, however, has decades of consistent growth, through peaks and recessions. They maintained profitability throughout the low point in the economy.

Revenue Growth

Year	Revenue
2009	$20.9 billion
2008	$24.8 billion
2007	$22.6 billion
2006	$20.1 billion
2005	$17.3 billion
2004	$15.6 billion

Emerson has an average annual revenue growth of approximately 6% over the past five years.

EarningsGrowth

Year	Earnings
2009	$1.724 billion
2008	$2.412 billion
2007	$2.136 billion
2006	$1.845 billion
2005	$1.422 billion
2004	$1.257 billion

This represents between 6% and 7% average annual earnings growth over the past five years.

Cash Flow Growth

Year	Cash Flow
2009	$3.086 billion
2008	$3.293 billion
2007	$3.016 billion
2006	$2.512 billion
2005	$2.187 billion
2004	$2.216 billion

Emerson has grown cash flow by about 7% on average per year over the past five years.

Profit Margin

Emerson currently has a profit margin of over 8%.

Dividends

Emerson has increased their dividend for 53 consecutive years, which is absolutely remarkable. For over half of a century, there has not been one year where Emerson did not raise their dividend for shareholders.

Dividend Growth

Year	Dividend	Yield
2009	$1.325	3.30%
2008	$1.23	2.50%
2007	$1.0875	2.30%
2006	$0.93	2.30%
2005	$0.845	2.50%
2004	$0.8075	2.60%

Over these past five years, Emerson has raised its dividend by over 10% per year on average. Between 2009 and 2010, however, Emerson decided to only raise its dividend by a tiny 1.5%; a token increase to preserve its unbroken chain of dividend increases.

EMR’s dividend payout ratio is currently about 60%, and their dividend yield is about 2.9%. So the payout is moderate in size and quite safe.

Share Repurchases

Over the past four years, Emerson has repurchased approximately $3.5 billion worth of its own shares. This corresponds to about 10% of its current market capitalization.

Balance Sheet

Emerson Electric has a LT Debt to Equity ratio of 0.52 and a Total Debt to Equity ratio of 0.66. This company has a very reasonable amount of debt, as this is neither very high nor very low.

Investment Thesis

Emerson produces technology and services that keep the world running. Process Management control systems allow manufacturers to do what they do, and Network Power allows data centers and telecommunications networks to do what they do. The segments of this large business provide the necessary tools to keep the developed world operating as it does, and help the developing world continue to improve the standard of living. Fundamental backbone infrastructure requires companies like Emerson to exist and grow. As the world continues to develop and modernize, Emerson has an ocean of opportunities to grow as long as it can continue to compete.

Emerson is an engineering company that doesn’t require a huge amount of technical expertise to invest in. The products are straightforward, easily understood in principle, and not flashy. They sit in the back room and keep the business running.

Even in the deepest part of the recession, although EMR was very much affected, the company continued to produce a profit. Their stable financial condition, necessary products, and geographical spread around the world allowed them to weather the storm.

Combine these necessary products with a company culture that has produced over a half-century of consecutive dividend increases, I expect Emerson to continue to do well for years to come. Their balance sheet and cash flow are fairly strong, and the company exists within growing industries and operates around the world.

Risks

Like any company, Emerson has risks. Notably, Emerson took a rather large financial hit in this recession. EMR is reliant upon the health of businesses around the world to continue to operate, and has a variety of competitors from around the globe.

Conclusion and Valuation

Emerson stock is not cheap right now with a P/E of about 20. Still, I think in the long term, EMR is going to prosper as a company. I personally think $46 represents a reasonable entry price for this stock at this time.

Full Disclosure: I own shares of EMR at the time of this writing.
You can see my full list of individual holdings here.

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