Monday, January 25, 2016

Putting Emerson Electric in the Portfolio

I decided to add shares of Emerson Electric(EMR) on January 22nd. For those of you that have never heard of this company they have been around quite awhile(125 years). The company sells a wide variety of services and products. Many of their services help other companies save money via their engineering and automation expertise. Most regular people would probably recognize their RIDGID power tools and ClosetMaid brands. One item to note is the company is spinning off its Network Power division expected to be completed by September 2016.

EMR has had a rough 10 years as the stock has gone up and down, but if you bought in 2006 you'd be roughly in the same spot. Although you would have collected about $15.11/share in dividends during that time. Emerson is known as a Dividend Aristocrat and a Dividend King for having increased its dividend for the last 25 and 50 years in a row. Not an easy feat and one few companies have managed. Although it's last payout bump was quite meager as it was bumped from $1.88 to $1.90 for 2016.  This highlights the challenges the company has faced. Even with a modest bump the 10 year growth rate(2006-2016) still comes in at 7.41%. From 2005-2015 the growth rate was 8.35%. The company has also been aggressively buying up stock the last few years spending over $5.25 billion dollars. It remains to be seen if this was a good use of company cash considering the stock price has not appreciated much. Also the company is scheduled to purchase another 70 million shares this year, or about 10.75% of the current shares outstanding.

Revenue has been stagnant for awhile as it's oscillated between 20-24 billion for most the last 10 years.  However management was able to deliver ROA of 9.57%, ROE of 29.88% , and ROTC of 22.8% the last year despite many challenges. The company also increased operating margins the last 3 years from 13.8% to 14.7%. Additionally the net income profit percentage has increased from 8.1% to 12.15% during the same time.

The balance sheet is pretty good also with a current ratio of 1.29, total A/L of 1.58, and subtracting goodwill and intangibles shows 0.99. I also like how the long term debt has stayed relatively flat the last 3 years and currently sits at $4.2 billion, which should be manageable for the company.

The stock currently yields almost 4.5% and is trading near a 52 week low. Based on 2016 guidance we can expect a 7.5% earning yield at today's prices. Plus the large dividend which we can expect at the very least to stay steady should provide some comfort.  I expect the next year to be tough and management has already conveyed that message in its guidance. I think a lot of the bad news is baked in, and unless the global economy really unravels this should be a safe pick. Especially since they help other companies figure out ways to run their energy and mechanical systems more efficiently which will be essential for others to weather the downturn themselves.  I do expect the company to outperform the next 10 years.


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