This article originally appeared on The DIV-Net December 21, 2009.
Linked here is a detailed quantitative analysis of Emerson Electric Co. (EMR). Below are some highlights from the above linked analysis:
Company Description: Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
EMR is trading at a discount to 1.) and 3.) above. The stock is trading at a 13.0% premium to its calculated fair value of $36.97. EMR did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
EMR earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. EMR earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 52 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
EMR earned a Star in this section for its NPV MMA Diff. of the $637. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as EMR has. If EMR grows its dividend at 6.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.72%. EMR earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Other: EMR is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: EMR did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks EMR as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $44.74 before EMR’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 52 years of consecutive dividend increases. At that price the stock would yield 2.95%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.7%. This dividend growth rate is less than the 6.4% used in this analysis, thus providing a margin of safety. EMR has a risk rating of 1.25 which classifies it as a low risk stock.
EMR has a strong competitive position within its major product categories and a reputation for providing consistent returns to investors. EMR’s advantages include globally branded platforms, new products in the pipeline, a strong balance sheet and free cash flow. The stock is currently trading above my buy price of $36.97, but given its strong dividend fundamentals, I will give it consideration as my asset allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in EMR (3.7% of my Income Portfolio). What are your thoughts on EMR?