Is Emerson Electric the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Emerson Electric (NYSE: EMR  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Emerson Electric.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 4% Fail
  1-Year Revenue Growth > 12% 11.4% Fail
Margins Gross Margin > 35% 39.6% Pass
  Net Margin > 15% 10.2% Fail
Balance Sheet Debt to Equity < 50% 49.9% Pass
  Current Ratio > 1.3 1.48 Pass
Opportunities Return on Equity > 15% 21.7% Pass
Valuation Normalized P/E < 20 23.64 Fail
Dividends Current Yield > 2% 2.3% Pass
  5-Year Dividend Growth > 10% 9.8% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Emerson Electric manages to get halfway to perfection with a score of 5. But over the past year, investors have recognized some of its future prospects -- and so far, they've mostly liked what they see.

Emerson is in the power business, but it neither generates electricity of its own nor maintains a massive transmission network to deliver it from power plants to customers. Instead, it helps businesses manage their power needs more efficiently. From large nuclear power plants and wind-energy farms all the way down to the small motors you may well find in your household appliances, Emerson has an impressive breadth of offerings. And with better returns on equity and higher margins than competitors Siemens (NYSE: SI  ) and Honeywell (NYSE: HON  ) , Emerson is maintaining its strong position as well.

Perhaps most impressive is Emerson's history of paying dividends. With 54 straight years of dividend hikes, Emerson is among the elite of the elite. And unlike fellow Dividend Aristocrat Consolidated Edison (NYSE: ED  ) , whose annual dividend hikes tend to be relatively small, Emerson's dividend increases are substantial, nearly eclipsing the 10% threshold we look for.

Emerson isn't an exciting stock. But for income investors seeking dependable dividends and slow but steady growth, Emerson may be exactly what you're looking for.

Keep searching

No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Emerson Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Emerson Electric is a Motley Fool Income Investor choice. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2011, at 9:00 PM, rsinj wrote:

    Is anyone else as tired as me seeing all these MF writers doing nothing more than filling in the blanks of an article? It's pathetic - go click on the other articles by this writer. They are all the same, word for word, just change the stock name, symbol, financials.

    MF is doing a tremendous service showing us all why some web-based businesses really have nothing behind them. These people really don't have anything genuine to write about...just write it once and recycle over and over. So many of the MF writers do this it is so funny when you read the articles. Go ahead and see what I'm talking about - you'll visit MF lots less frequently once you see it.

    What a waste MF is.

  • Report this Comment On February 09, 2011, at 12:40 PM, hopfnerj wrote:

    No, I personally am not tired of the approach TMF is using on the website. There are several writers for the service who are doing different series of articles on a common topic or theme-- where it makes sense that portions of the narrative (like the introduction or the definitions) don't change from one installment to the next.

    This series you're complaining about is a good example: the articles all apply the same set of financial tests to different companies, to see how well or poorly each company measures up. Sure, the writer could do the full article the first time and then provide nothing but the new information (basically the financial table and the summary) for all the future installments. But that approach wouldn't be efficient for readers in the aggregate, because we'd have to click through to the original article if we needed to refresh our memory about the author's approach. I'd rather see the definitions and the introductory narraitve repeated in each installment. Those readers who remember the recurring material from last time can just go straight to the results table if they want to.

    You're right that TMF authors could alter the explanatory wording each time they do a new installment in the series--but I'm not seeing the need to do that, myself. The value for me lies in the results for each company (and in the chance to compare results across companies and across industries), not in whether the writer changes every word for each successive installment.

    But then, I've been following this "Perfect Stock" series and have been finding it valuable, even though every word isn't written anew for each installment. Unless the tables of results stop changing for each new company, I'll continue to read the articles. But it's okay if your expectations differ from mine: you can keep searching till you find what you're looking for.

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