Emerson Electric (EMR 0.05%), the global provider of power systems, engineering services, industrial automation and other technologies, has been in existence since 1890. The company enjoys annual revenues of $24.7 billion and posted an after-tax profit margin of 8.1% in its recently concluded fiscal year ended Sept. 30. Emerson has increased its dividend for 57 consecutive years, putting it into elite company: Only three other U.S. companies currently have a 57-year streak going, and only four U.S. companies own streaks greater than 57 consecutive years. In this series, we look at popular dividend stocks to ascertain whether a certain crowd favorite is a dividend beast, backslider, or bust. How does EMR, currently trading near an all-time high, stack up?
The company's revenues are attractively diversified
Emerson operates in five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial and Residential Solutions. Process Management is the company's largest segment: At $8.6 billion of revenue, it accounts for almost 35% of total annual revenue. This segment is also the second most profitable, with an operating margin of 21%, as well as the fastest growing segment, recording 9% year-over-year growth.
Emerson's segment diversification favors revenue and margin growth. The segment with the most heft and momentum is not overly concentrated, at 35% of the total, but it's concentrated enough to pull along the other divisions in a year in which the company saw mixed success among its various products and services. Following is a chart of the segments' performance relative to the whole in fiscal 2013:
| Segment | 2013 Revenue | Year-Over-Year Sales Growth | Margin | 2013 Earnings |
|---|---|---|---|---|
| Process Management | $8.6 | 9% | 21.00% | $1.8 |
| Industrial Automation | $4.9 | (6%) | 15.90% | $0.8 |
| Network Power | $6.2 | (4%) | 9.00% | $0.6 |
| Climate Technologies | $3.9 | 3% | 18.50% | $0.7 |
| Commercial and Residential Solutions | $1.9 | (1%) | 21.70% | $0.4 |
Source: SEC 10-k filing. All dollar figures in billions.
Management is proactive
Emerson's management exhibits both pragmatism and pro-activeness. An example is the company's decision to divest itself of its Embedded Computing and Power, or EC&P, business. Having struggled with persistently weak demand for embedded computing technology, management recorded a $503 million impairment to goodwill against this business in 2013, and decided to sell a 51% stake in EC&P to privately held Platinum Equity, thus creating a standalone company in which it holds a non-controlling minority interest. The underperforming segment, which produced only $44 million of earnings before taxes on $1.2 billion of sales, garnered $300 million of cash in the sale. By stepping in and divesting itself of a weak business, Emerson swallows its lumps on its goodwill writedown, but frees up resources to invest in opportunities where stronger demands exist. The company utilized the cash from sale to shareholders' benefit, allocating the funds to its $623 million share repurchase in the fourth quarter of 2013.
Cash flow and balance sheet resources can support investments in growth
Well aware that all segments aren't exhibiting revenue growth, management apparently has decided to allocate capital to existing technology and fixed assets in order to invigorate sales across the entire business. In the words of CEO David Farr:
So what we're trying to do right now is to take our selective investments and try to drive a little bit premium growth to that. ... We need to make sure that we can drive as much growth through these internal investments, which are high quality. And we have the cash, we have the balance sheet and that's what we are going to focus on.
Source: Seeking Alpha earnings call transcript.
Farr introduced this initiative in the company's fourth-quarter 2013 call in November, outlining at least one specific item, a $50 million upgrade to its Oracle software in its Network Power segment, with a promise of more detail forthcoming in February. The company has ample resources to invest in its business segments next year. Emerson reports $3.3 billion of cash on its balance sheet as of Sept. 30, and its current assets of $11 billion cover not only short-term liabilities of $7.6 billion, but nearly all of its long-term debt of $4 billion as well. A significant cash investment in not only capital equipment but also in the marketing of lagging segments presents no problem to Emerson; the only question lies in choosing the right investments, of which we'll learn more in February.
Cash flow can also support returns to shareholders
As the company commits capital to investments, it won't be required to adjust its current cash returns to shareholders. In fiscal 2013, supplying a dividend that currently yields nearly 2.5% utilized $1.2 billion of the company's cash. Share repurchases consumed another $1.1 billion, although as I mentioned, roughly $300 million of the share buybacks were funded with sale proceeds from the EC&P divestment. Emerson is something of a cash machine, having generated $3.6 billion in operating cash from its $24.7 billion in sales in 2013. Continuing these reasonable levels of dividends and share repurchases will allow the company to both raise its dividend in 2014 by 5% (already authorized), and proceed with the forecasted investments without breaking the bank.
An easy verdict
On a total return basis, Emerson Electric's shares have returned 141.3% over the past five years, versus the S&P 500's total return of 136.6% for the same period.Thus, the company is a good proxy for the overall market with potential outperformance in the next five-year period. Accounting for the risks in the slower growth of the Industrial Automation and Network Power segments in particular, Emerson Electric is a dividend beast. Given that both the markets and EMR are chasing all-time highs, investors may want to slowly average into a position in this equity in 2014.
