The real-money Inflation-Protected Income Growth portfolio owns shares of Emerson Electric (NYSE:EMR). Emerson Electric, like every company in that portfolio, earned its place because at the time it was purchased:

  • Its shares appeared to be reasonably priced.
  • Its balance sheet looked solid.
  • It had a covered dividend with a history of increases.
  • That dividend looked capable of continuing to rise.
  • And the company fit reasonably well within the portfolio from a diversification perspective.

Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made Emerson Electric worth owning to determine if it still has what it takes to retain its spot in the iPIG portfolio.

Valuation
Based on a discounted cash flow analysis, Emerson Electric's business looks to be worth around $45.9 billion, and its stock recently closed at a price that gave the company a market capitalization of $47.2 billion. While the company's market price is ahead of its fair value estimate, the two are close enough to say that Emerson Electric looks reasonably priced. After all, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict exactly correctly.

Result: Hold based on valuation.

Balance sheet
Emerson Electric has a solid balance sheet, with a debt to equity ratio of around 0.5. That low debt to equity ratio gives the company the flexibility to manage through financial turmoil and economic cycles while remaining strong. In addition, the company has well over $3 billion in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.

Result: Hold based on balance sheet.

Dividend
Emerson Electric has a better than 50-year history of regularly increasing its dividend, and recently raised its dividend to $0.43 per share per quarter, up from $0.41 per share per quarter. Dividend growth is an important characteristic that the iPIG portfolio actively seeks, and Emerson Electric has a tremendous track record of delivering on that goal.

In addition, the dividend remains well covered, with a 59% payout ratio. That payout ratio means that the company retains 41% of earnings to invest in future growth, while directly rewarding its shareholders with cash for the risks they take by investing.

Not only are Emerson Electric's dividends covered by accounting earnings, they're also well covered by cash flows. The company generated around $2.97 billion in free cash flow in the past four quarters, while paying out $1.18 billion in dividends. That means its operations threw off $1.79 billion more than it needed to cover both its expansion plans and its direct rewards to shareholders.

Result: Hold based on dividends.

All told, a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, Emerson Electric still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and shifts in its operating environment that reduce its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.

Chuck Saletta owns shares of Emerson Electric Co.. The Motley Fool recommends Emerson Electric Co.. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.