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Will Emerson Electric Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

One thing that just about every company needs is energy. But with costs on the rise, everyone's looking to cut back on unnecessary energy costs. That's where Emerson Electric (NYSE: EMR  ) comes in, with products and services to help businesses cut back on power usage and boost their efficiency. But with intense competition, can Emerson keep up the pace? Below, we'll take a look at how Emerson Electric does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

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

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $34.8 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 1.23 Fail
  Worst loss in past five years no greater than 20% (33.6%) Fail
Valuation Normalized P/E < 18 15.43 Pass
Dividends Current yield > 2% 3.3% Pass
  5-year dividend growth > 10% 8.8% Fail
  Streak of dividend increases >= 10 years 55 years Pass
  Payout ratio < 75% 46.5% Pass
       
  Total score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With five points, Emerson Electric has some of what conservative investors like to see in a stock. Yet the shares have only had a tepid return recently, rising about 10% in the past year.

Emerson has had to deal with tough times in the past year. Flooding in Thailand hurt its results early in the year, as Emerson's supply chain got disrupted, causing delays in recognizing revenue. Moreover, with slow capital spending from AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) due to their uncertainty about industry consolidation and overall strategy, Emerson's network power division got fewer orders from the telecom industry, hurting results.

But Emerson hasn't been shy about trying to find ways to improve. In April, it decided to buy the marine container and boiler business of Johnson Controls (NYSE: JCI  ) to add to its climate technologies division. The move broadens Emerson's scope beyond residential and commercial heating and cooling to include marine vessels.

Still, Emerson has had to deal with setbacks. The company cut its revenue guidance for the fiscal fourth quarter back in July, noting the strong dollar as a cause for concern. That may continue to be a problem, as Eaton (NYSE: ETN  ) has also had to rein in guidance due to currency fluctuations.

For retirees and other conservative investors, Emerson's status as a Dividend Aristocrat is quite valuable. For those willing to put up with a bit more volatility than average, Emerson's valuation and yield look reasonably attractive.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Emerson Electric to My Watchlist, which will aggregate 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. Motley Fool newsletter services have recommended buying shares of Emerson Electric. 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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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

12/18/2014 4:00 PM
EMR $62.00 Up +2.26 +3.78%
Emerson Electric CAPS Rating: *****
ETN $67.45 Up +2.57 +3.96%
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JCI $47.20 Up +1.52 +3.33%
Johnson Controls,… CAPS Rating: ****
T $33.51 Up +0.84 +2.57%
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