Emerson Electric's (EMR -0.67%) fourth-quarter results did two things that will interest investors. First, they gave a good reading on trends in the global economy -- something all investors should be watching. Second, they confirmed just why the company remains a dividend favorite. Putting these things together, is the stock worth buying?
Emerson Electric: Performing well amid some global challenges
Earlier in the year, Fools saw how buying stock in Emerson Electric was largely a play on economic trends in the global economy. With this in mind, it's a good idea to track how its geographic performance fared relative to management's expectations at the start of the year.
Here is a look at full-year underlying sales (excluding acquisitions and divestitures) versus what was planned in early 2014:
| Segment | Plan | Actual |
|---|---|---|
| USA | 3%-5% | 4% |
| Europe | 0%-2% | 1% |
| China | 6%-8% | 7% |
| Other Asia | 6%-8% | 1% |
| Latin America | 6%-8% | 2% |
| Middle East & Africa | 8%-10% | (1%) |
| Underlying | 3%-5% | 3% |
Source: Emerson Electric presentations.
With underlying sales at the bottom end of its projected range for the full year, it's clear that its end markets didn't work out as planned. Of course, Emerson Electric isn't alone in seeing significant changes occur in the mix of global growth. Indeed, fellow industrial bellwether 3M also reported a similar story of the U.S. strengthening, with certain emerging markets (particularly Latin America) weakening notably.
It's problematic in 3M's case, because the company is actively investing in emerging-market growth. It also creates difficulty for Emerson Electric, because infrastructural spending decisions made in emerging markets will affect growth in its two most important segments, namely process management and industrial automation.
Moreover, Emerson Electric's geographic trends also confirm what the International Monetary Fund data suggests, as addressed in my recent 3M article. In other words, Europe's economy is slowing, China remains on track, and North America is doing better. A look across segmental sales for Emerson Electric in the fourth quarter illustrates these trends: China faced a challenging comparison in the process management segment, which is why its numbers are superficially bad.
| Sales Growth % | Process Management | Industrial Automation | Network Power | Climate Technologies | Commercial & Residential Solutions |
|---|---|---|---|---|---|
| North America | 13% | 12% | 1% | 7% | 7% |
| China | (3%) | 7% | (2%) | 7% | (11%) |
| Europe | Flat | (2%) | 7% | (3%) | (2%) |
Source: Emerson Electric presentations.
However, the good news is that management forecast overall underlying sales growth of 4%-5% for 2015 -- a reasonably bullish figure. Not only is it ahead of this year's figure of 3%, but it's also ahead of the 3%-4% that management is forecasting for "global gross fixed investment."
As the first table above indicates, this will only be achieved if global growth is favorable -- something far from certain in the current environment.
Emerson Electric: Still a dividend favorite
I suspect many readers follow the company because it's a so-called Dividend Aristocrat -- a company that has increased its dividends for at least 25 years (58 years, in this case). Interested readers can access an in-depth article on Emerson Electric's dividend potential here.
By my calculations, the company recorded a return on equity (net income divided by shareholder equity) of more than 21.5%. For the reasons outlined in the article linked above, this indicates the company has the potential to grow its dividend by roughly 11.6% in future.
Given that its current yield is 2.7%, and the benchmark U.S. 10-year Treasury note yield is only 2.4% at present, the stock remains an attractive choice for income-seeking investors. Put another way, if Emerson Electric increases its dividend at the rate suggested above, it will be paying an additional 8% of its current price in 10 years.
The Foolish takeaway
All told, a company like Emerson Electric is never really going to see its prospects divorce themselves from global growth. The outlook today is mixed, to say the least, with geopolitical tensions slowing the kind of large-scale infrastructural spending that helps Emerson Electric.
If China sneezes, then the company will certainly feel the effects in its emerging-market sales. However, a strengthening North American market was enough to keep its underlying sales within its target range in its 2014 fiscal year, and investors will hope for more of the same in 2015. The stock remains attractive for dividend hunters.
