1 Dividend King To Survive a Market Fall
Emerson Electric is a global technology and software provider with a remarkable record of consistently increasing dividends, but is the company generating enough cash to sustain its dividend and growth?
Emerson’s steady results, impressive business model, and conservative payout ratio have allowed it to increase its dividend for 67 years. It has one of the longest dividend growth streaks among all stocks, placing it on the prestigious list of Dividend Kings – companies that have raised their dividends annually for at least 50 years – and has increased its dividend by 1.4% annually over the past five years and 2.2% annually over the past decade.
It has also been expanding the customer base over the years and now holds a dominant global presence and remarkable brand strength, providing a significant competitive edge in the market. This has also helped the company demonstrate remarkable resilience during downturns despite the industry’s sensitivity to economic cycles.
So while Emerson has consistently paid dividends, will the combination of dividends and growth be enough to withstand a market correction?
Is Emerson Headed for Continued Growth?
Emerson’s fiscal first-quarter net sales increased 22% year-over-year to $4.12 billion, beating the consensus estimate by 5.3%. The company’s adjusted earnings per share rose 56% from the year-ago period to $1.22, surpassing analysts’ estimates by 17.1%.
Moreover, its operating cash flow grew 47% year-over-year to $444 million, while its free cash flow increased 51% to $367 million, demonstrating its ability to generate cash from its core business operations.
While Emerson’s pretax margin declined 910 basis points to 3.4%, the industrial conglomerate forecast full-year adjusted earnings per share between $5.30 and $5.45.
Emerson also anticipates net sales growth between 14.5% and 17% for the full year, with underlying sales growth in the range of 4.5% to 6.5%. Notably, the company expects to generate free cash flow between $2.6 billion and $2.7 billion for the year, a figure that should provide Emerson with the flexibility to invest in growth opportunities and continue rewarding its shareholders through dividends and share repurchases.
In fiscal 2024, the company expects to return shareholders roughly $500 million through share repurchases and approximately $1.2 billion via dividend payments.
Emerson’s Hefty Investment in Automation
Emerson has been evolving in recent years, focusing on the industrial automation space. It sees an opportunity as companies revamp their operations with technology amid labor shortages.
In 2022, Emerson Electric Co. (NYSE:EMR) sold a majority stake in its Climate Technologies business as it planned to become a pure-play global automation company serving diversified end markets.
The company has been accelerating its transformation by divesting non-core businesses, including InSinkErator and Therm-O-Disc. Emerson focused on investing in organic growth opportunities and important transactions, which included AspenTech.
The company closed the combination of its software businesses with AspenTech to create a global industrial software leader, of which Emerson owns 55% on a fully diluted basis.
The industrial leader continued embarking on its savvy acquisitions last year to broaden its portfolio capabilities. It has been venturing into new technologies that could open new avenues for higher revenue generation and consistent cash flows.
In October 2023, Emerson closed its acquisition of NI, a leading provider of software-connected automated test and measurement systems. NI expands Emerson’s capacity to capitalize on trends like nearshoring and digital transformation while increasing its end-market exposure in discrete markets. NI also increases Emerson’s exposure to high-growth industrial software markets.
Is Emerson Stock a Buy Now?
The company’s healthy increase in net sales and adjusted earnings per share, strong cash flow, and strong fiscal 2024 guidance bolstered investors’ sentiment. That sparked a stock rally of about 6% over the past month to hit its 52-week high of $111.05 in the last trading session. Over the past three months, the stock has returned more than 24%.
However, the company looks poised to hit new highs this year, given its remarkable growth trajectory and improving sentiments, particularly with expectations that the Fed will cut rates this year.
Of the 22 analysts providing ratings for the stock, 16 suggest buying it, and 6 recommend holding it. The average analyst price target of $119.03 indicates a potential upside of 7.9%.
Emerson’s long-standing record of consistent dividend payouts showcases its financial stability and steady cash position. Moreover, the company’s robust guidance reflects its confidence in its cash flow generation.
The reliable dividend growth given a conservative payout ratio and the company’s ability to generate cash, along with the price appreciation potential based on its growth initiatives, make the stock an enticing long-term investment, particularly if volatility rises.
