EMR - Emerson Electric: Dividend Trends After Impressive Q3 Numbers

2023-08-03 18:58:21 ET

Summary

• Emerson Electric's stock has rallied aggressively since the pandemic-induced earnings contraction, returning almost 60% to shareholders.
• Recent bullishness and strong Q3 results suggest potential for a breakout above all-time highs.
• Emerson's dividend yield is higher than the sector average, and the company has room to increase the payout ratio.

Intro

We wrote about Emerson Electric Co. ( EMR ) approximately three years ago when the company was struggling to deal with the ramifications of the pandemic. However, given how the company was able to cut costs aggressively and maintain the dividend payout to boot, we stated that the pandemic-induced earnings contraction would most likely not affect the company's long-term growth curve overall.

At the time, Emerson was experiencing very tough comparables, and sentiment among investors was beginning to change. As we see though from the stock's long-term chart below, shares rallied aggressively out of those March 2020 lows for practically 18 months straight before finally topping out in August 2021. Since then shares have stagnated somewhat but have still managed to return almost 60% in total to its shareholders when we take dividend payments into account.

Bullish Technicals And Full Year 2023 Guidance

Furthermore, as the long-term chart shows, recent bullishness over the past two months or so has resulted in a crossover of the stock's MACD technical indicator. This indicator is especially noteworthy on long-term charts due to the amount of information it digests from both a momentum and trend standpoint. Therefore, it will be interesting to see if indeed shares have enough momentum currently to be able to break out above all-time highs in this present move to the upside.

Momentum should continue over the near term due to Emerson's very impressive Q3 results announced on the 2nd of August. Management reported adjusted EPS of $1.29 per share which was $0.19 per share higher than was previously guided. Furthermore, full-year guidance was also marked up as a result for both top and bottom-line growth as well as operating leverage as we see below.

Dividend Yield

Therefore, you can bet that long-term investors are crying out for an increase in the dividend as the quarterly payout of $0.52 has not been increased for some time now. Investors currently on the sidelines looking to buy into Emerson's current momentum would receive approximately a 2.2% yield based on a $2.08 per share annual payout. Although Emerson's strong momentum in recent years means the prevailing 2.2% yield comes in well below the stock's 5-year average, investors should still remember that Emerson's yield is considerably higher than what the sector pays out on average (1.45%).

Pay-out Ratio / Free Cash Flow

The pay-out ratio gives the quickest snapshot of the affordability of the dividend. However, based on what is coming down the track (with respect to how AspenTech will favorably affect Emerson's financials from Q4 onward), we believe the CFO's free-cash-flow annual guidance of at least $2.2 billion is an accurate projection based on current trends. Therefore by multiplying the current number of shares outstanding (572 million approx.) by a forward payout of $2.08 per share, we get an approximate cost of $1.19 billion for the dividend. Dividing the cost of the dividend payments into the free cash-flow projection number gives us a forward payout ratio of 54%. Suffice it to say, Emerson has ample room to keep on growing the payout (as the ratio remains well below 60%) especially if the above guidance numbers are reached in earnest.

Reducing Leverage

Long-term debt decreased to $7.64 billion at the end of Q3 and short-term borrowings fell to $667 million. Emerson's balance sheet (concerning its reducing leverage) has really improved in recent times which is a trend that is also bullish for dividend growth going forward. Reduced leverage means more of Emerson's operating profit can drop to the bottom line over time. Emerson's trailing twelve-month interest coverage ratio for example has risen to 20.38 (5-year average of 16.24) with the debt-to-equity ratio having dropped to 31.46% (5-year average of 79.75%). Suffice it to say, trends regarding Emerson's leverage are bullish for dividend growth going forward.

Conclusion

To sum up, Emerson Electric announced a very impressive set of Q3 results where full-year guidance was increased as a result. Although the quarterly dividend payment of $0.52 per share was not increased, both the stock's technicals and financials are pointing to a potential breakout above the stock's all-time highs ($104+). Suffice it to say, investors should not have to wait long for a further hike in the dividend based on current trends. We look forward to continued coverage.

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