Emerson Electric: A Hidden Dividend Gem

by Marc Bastow | April 11, 2013 12:33 pm

As retirement planners, we all know about the big-name dividend players who’ve been around for what seems like forever, with dividend histories as long or longer than some of our lives.

You know. Coca-Cola (NYSE:KO[1]). Johnson & Johnson (NYSE:JNJ[2]). Those guys.

But just below that first layer is another group of lesser-ballyhooed dividend stocks … “hidden gems,” so to speak. They’re just as steady and solid as the Cokes and J&Js of the world. They’ve got may of the same great attributes — wide moats, global reach, steady financial structures, diversified businesses. And they’ve managed to increase dividends for decades.

Be it because of an unsexy business, making products not often in the public eye, what have you, they occasionally go under the radar. But me? I think these gems belong on the surface — and in our portfolios.

Let’s start with one of my favorites: Emerson Electric (NYSE:EMR[3]).

Emerson got its start in 1890 in St. Louis, founded as a manufacturer of electric motors and fans. The company developed, manufactured and sold the first electric fans in North America, and in 1897 introduced the ceiling fan, which quickly became half of the company’s business.

A century and change later, Emerson is a diversified global manufacturer serving commercial, consumer and industrial markets, with its 235 manufacturing facilities around the globe helping to power $25 billion in revenues annually.

Click to Enlarge Each of the business units serves fairly wide markets with very little overlap, providing strong revenue diversification. That has helped revenue growth that admittedly has gone from spectacular to steady … but for a long-term investment meant to slowly appreciate while delivering income, we’ll take steady.

The bumps and bruises of 2008-10 are familiar to anyone in the manufacturing world, and EMR wasn’t immune to the downturn, but it didn’t take Emerson long to regain its momentum. Going forward, analysts anticipate a solid 3.4% rise in sales for fiscal 2013 followed by another 5.2% improvement in 2014.

Earnings growth has been a bit spottier, including some bumps and bruises in recent quarters. However, the primary culprit in the recent downturn was a nearly $600 million impairment charge against earnings on telecommunications and information technology-related businesses. While recognizing a difficult 2013 ahead, EMR projects growth in the mid-to-upper single digits, in line with analyst estimates.

Click to Enlarge Where Emerson shines brightest is on the dividend side — EMR has hiked its dividend for 56 consecutive years, easily qualifying it for recognition as one of InvestorPlace‘s Dependable Dividend Stocks[4].

But its on the dividend side of the street where the company shines brightest, as Emerson has increased its dividend for 56 consecutive years. It currently yields a smart 2.9% — and while not enormous, it should be pointed out that number has shrunk amid a nearly 20% run in the past six months.

Emerson has a five-year dividend growth rate of nearly 9% that should be easily maintained or exceeded thanks to ample free cash flow of $1.1 billion and cash of $2 billion as of the latest quarter. In fact, despite its problems in and following the financial-crisis dip, free cash flow hasn’t fallen below $2 billion in any given year. The company has plenty of room to continue paying dividends, and Chairman and CEO David Farr believes in rewarding shareholders for the long-term[5].

One caveat: EMR currently is trading at the bottom of a $58-$62 range — a range the stock has rebuffed several times since 2007. I believe in the company’s ability to achieve steady growth in the long-term, and the market’s ability to accurately reflect that, but it’s at least worth noting Emerson’s past difficulties in trading much further above its current levels.

Even then, for retirement purposes, this stock is all about the long-term stability provided by a sizable and growing paycheck. Don’t ignore Emerson any longer.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/04/emerson-electric-a-hidden-dividend-gem/

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