"Do Your Own Due Diligence, But By God, Don't Drink Away Your Equity!"




What Can Investors Expect Of Emerson Electric's Dividend Going Forward?

April 12, 2014

If you're looking to buy a partial ownership stake in a publicly-traded company, then there are a number of things that you should consider before doing so. These things include the company's business model, historical earnings growth and corporate governance. Another thing that you may want to consider is the dividend.

Dividends are very important as they can provide some cushion for investors to the downside and can also signal confidence from management in the company's future. Many investors pursue dividend-paying stocks to augment their returns with a nice income stream. Most of them prefer to diversify into many different sectors of the economy in order to spread out their risk.

Today, let's take a look at Emerson Electric, a huge player in the industrial sector of the economy. Let's see how the dividend of Emerson Electric stacks up in terms of strength and sustainability and what investors can expect going forward.

Dividend Yield

The first and most obvious consideration when evaluating a company's dividend is the dividend yield, which represents the percentage of your investment that you'll receive back over the next 12 months at current share prices and dividend payouts.

Emerson Electric currently yields 2.6%, which is decent in absolute terms, given that the 10-year treasury note yields about the same. Over the last five years, the company's dividend yield has ranged between 2.2% and 4.2%, with the yields around 4% occurring during the depths of the financial crisis. Given that that time period was rather extraordinary, I wouldn't expect 4% yields from Emerson Electric anytime soon. Since the financial crisis, the yield has ranged between 2.2% and 3.4%.

Dividend Growth

When analyzing a dividend, it's not all about the yield. As an income investor, you want that dividend to grow over time in order to protect your income stream from the erosive effects of inflation as well as to show confidence from management in the company's outlook.

2013 2012 2011 2010 2009
4.9% 2.5% 16% 3% 1.5%

Table 1: Dividend Growth Rates from Emerson Electric

Table 1 shows that recent dividend increases from Emerson Electric have been rather small, except for the 16% increase that was seen during 2011. However, even the most recent dividend growth rates still beat out inflation, which currently sits just above 1%. Emerson Electric has increased its dividend each year for the last 57 years.

This long streak of dividend increases lands Emerson Electric on the list of S&P 500 Dividend Aristocrats, an elite group of companies that have increased their dividends for at least 25 years straight. The good yield and strong history of dividend increases illustrate the commitment of Emerson Electric when it comes to returning cash to shareholders.

Free Cash Flow Payout Ratio

While high dividend yields and strong dividend growth are nice, we need to make sure that the company in question can generate enough cash flow to cover its dividend payment. The free cash flow payout ratio tells us what percentage of the company's free cash flow is eaten up by dividend payments. Lower free cash flow payout ratios are better as they leave more room available for future dividend increases or other uses of the capital.

Free cash flow is the cash flow a company generates in its operations minus capital expenditures.

TTM 2013 2012 2011
40% 40% 49% 40%

Table 2: Free Cash Flow Payout Ratios of Emerson Electric

Over the last 12 months, Emerson Electric has paid out just 40 % of its free cash flow to shareholders in the form of dividend payments. This percentage is inline with what the company has done over the last few years. This is a very healthy payout ratio, which leaves plenty of room for future dividend increases, along with other value-creating activities.

From looking at the company's free cash flow payout ratio, it can be concluded that the dividend is in no danger at this point in time.

Interest Coverage Ratio

One of the ways in which we can determine whether or not a company will have trouble paying its dividend in the future is by looking at how much interest it has to pay every year. More money spent on interest means less money that is left for dividends. To determine the effect that debt has on a company's ability to pay its dividends and fund other activities, I calculate the interest coverage ratio. This ratio is calculated by dividing the company's earnings before interest and taxes by its interest payments over the year. You generally like to see this ratio at or above 2. If it's below this figure, then that may signal trouble ahead for the company in question.

Fortunately, this is not a problem at all for Emerson Electric. Its earnings before interest and taxes over the past 12 months covered its interest obligations almost 16 times. At this point, debt is not having an effect on the company's ability to pay its dividends.

Earnings Per Share Growth Forecasts

While it's good to look at what past dividend payouts have been and how they relate to past earnings, we need to get an idea as to what future dividend payouts are going to look like. One of the ways in which we do this is by looking at analyst forecasts for earnings-per-share growth. This year, analysts expect Emerson Electric to increase its earnings per share by 7.1%, followed by an 11.1% increase in 2015. It should be mentioned that these projections are based on non-GAAP earnings.


The stock of Emerson Electric currently has a reasonably attractive dividend yield. The company has shown a strong commitment to returning cash to shareholders through its 57-year streak of dividend increases. While the company has been very conservative over the past two years when it comes to dividend increases, its free cash flow payout ratios over the last several years show that Emerson Electric can certainly increase its dividends at a faster rate. Analyst estimates that call for earnings per share growth in the high single-digit to low double-digit range reinforce this notion.

It should be mentioned that over the last three years, Emerson Electric spent just as much money on buybacks as it did on dividends. If the company chooses to slow down on its buybacks, then we could see Emerson Electric increase its dividends at a high single-digit rate if not a low double-digit rate.





"Do Your Own Due Diligence, But By God, Don't Drink Away Your Equity!"