Portfolio Update
The FiveTwenty portfolio received $326.55 in dividends in the past week. AFL, BKH, ENB, FTS, INTC, SJM, SWX paid their quarterly dividend during the week.
| Past Week Dividend | $326.55 |
| Current Quarter Dividend (Q3 2022) | $857.39 |
| Lifetime Dividend | $5,464.55 |
| Estimated Annual Dividend | $6,259.30 |
The capital allocation for the week of 09/04/2022 to 09/10/2022 will be used to establish a position in Emerson Electric Co (NYSE: EMR)
EMR – Company Profile
Emerson Electric Co is a technology and engineering company that provides solutions for customers in industrial, commercial, and residential markets. The company operates through 2 segments: Automation Solutions, and Commercial & Residential Solutions. It serves customers in Americas, Asia, the Middle East, Africa, and Europe. Official Site | Wikipedia
| Dividend Streak | 65 years |
| Yield | 2.52% |
| Payout Ratio | 41.78%* |
| P/E | 16.58* |
* computed using TTM adjusted EPS of $4.93 as of Q3 2022
Financials
Does EMR have the financial means to sustain and raise its dividend going forward?
Over the last decade, EMR has struggled to consistently grow its revenue and net income. Between 2014 and 2017, the company saw sharp declines in revenue and net income. While net income has bounced back since, revenues are still below the peak reached in 2013. One source of the up and down in revenue have been constant changes in the EMR’s business portfolio. Starting in 2014 the financial results do not include revenue and income from the units divested in September 2016 (Network and Power segment and Leroy-Sommer and Control Techniques business).
While adjusted EPS show a similar trend to revenue and net income, EMR has been able to drive a more aggressive recover in adjusted EPS by using share buybacks. Adjusted EPS of $4.1 per share for 2021 surpassed the previous 10-year peak of $3.77 per share recorded in 2014.
The average dividend per share growth rate was 3.3% per year in the past 10 years and 1.4% per year in the past 3 years. (per GuruFocus) Since EMR has struggled in recent years to grow its top line revenues it has only increased its dividends by $0.01 or $0.005 per quarter. However, with recent portfolio adjustments that could results in faster growth and a current payout ratio of ~42%, EMR should continue to grow its dividend and possibly increase the rate of growth slightly.
FY 2021 and beyond
EMR has continued to employ its strategy of business portfolio management and share buybacks to grow both its top and bottom line. In Q3 2022 alone, EMR reached an agreement to sell the InSinkErator business to Whirlpool Corporation for $3.0 billion, closed the transaction with AspenTech in which EMR paid $6 billion in cash and transferred OSI Inc and the geological simulation software assets in return for 55% stake in AspenTech, closed the divestiture of Therm-O-Disk, and acquired Fluxa.
Financially, EMR had a solid year in 2021. Revenues increased 9% YoY and adjusted EPS were 19% higher than in 2020. Furthermore, the company was able to carry the momentum in to FY 2022, where for Q3 2022 revenues grew 7% YoY and adjusted EPS were 16% higher than in 2021.
Looking ahead, EMR expects full year 2022 revenue to grow 7-8% and adjusted EPS to come in between $5.05 to $5.15, an increase of 23% to 26% over 2021.
Valuation
Are we paying too much for EMR at the current share price?
In the last 10 years, EMR’s P/E ratio saw a low of 10.97 and a high of 30.51, with a median value of 19.91. (per GuruFocus) The current TTM P/E ratio of 15.49 (GAAP) and 16.58 (non-GAAP) is below the historical median. This suggest that by this measure the company is slightly undervalued.
The current share price of $81.75 is 3.3% below the 50-day moving average and 9.2% below the 200-day moving average. Additionally, the share price is near the 25th percentile of the 52 week trading range.
Yield
How does the current dividend yield for EMR compare to historical values?
In the last 10 years, the dividend yield for EMR has been in a range of 1.92% to 4.49%, with a median of 2.89%. The current TTM yield of 2.52% is below the historical median.
We expect EMR to increase its dividend for Q4 2022 to keep its dividend growth streak going. While this should nudge the yield closer to the historical median, we are ok with initiating our position at comparatively lower yield.
Thesis
Why are we adding EMR to the FiveTwenty portfolio?
EMR has a long track record of increasing dividend payments. The dividend growth rate has been minimal in the last couple of years due to challenging business conditions. However, the business portfolio adjustments, EMR has made in recent years seem to have the company on a growth trajectory again.
We are using the opportunity provided by the recent stock price pullback to add EMR to our portfolio at what seems a reasonable valuation.
Additional Research
- Emerson Electric Stock: Valuation Is Matching Growth Potential (NYSE:EMR) | Seeking Alpha
- Emerson And AspenTech: Software Deal Unlocks Value For Both (NASDAQ:AZPN) | Seeking Alpha
- Blue Chip Stocks In Focus: Emerson Electric – Sure Dividend
Photo by israel palacio on Unsplash
One Reply to “2022 Week 36: Emerson Electric Co (NYSE: EMR)”
Comments are closed.