The Top 5 Dividend Kings, Part 2: Emerson Electric

05/19/2020 5:00 am EST

Focus: STRATEGIES

Ben Reynolds

CEO, Sure Dividend

In times of economic uncertainty, investors should stick to quality. Instead of reaching for stocks with the highest dividend yields (which are typically accompanied by elevated levels of risk) investors should focus on high-quality dividend stocks, explains leading income expert Ben Reynolds, editor of Sure Dividend.

This is why we continue to recommend stocks with long histories of dividend growth, such as the Dividend Kings, which have each raised their dividends for 50+ consecutive years.

Read the Top 5 Dividend Kings, Part 1: Genuine Parts

Emerson Electric (EMR) has increased its dividend for 63 consecutive years, a highly impressive track record of steady dividend growth.

Emerson’s dividend history is even more impressive when you consider the fact that it operates in the industrial sector, which tends to be more cyclical and prone to downturns when the global economy enters a recession. And yet, Emerson Electric continues to deliver steady profitability and annual dividend increases for its shareholders.

Emerson Electric was founded in 1890. Today, it is a giant industrial manufacturing and engineering company, with over $18 billion in annual revenue, and a stock market capitalization of $32 billion. The company’s sales are split among two operating segments: Automation Solutions and Residential and Commercial & Residential Solutions.

Not surprisingly, the coronavirus crisis has hit Emerson hard, as it is highly exposed to fluctuations in the global economy. In the most recent quarter, Emerson’s net sales declined 9% from the same quarter last year, as underlying sales fell 7%. Emerson’s exposure to the oil and gas industry was a severe headwind.

However, cost controls allowed Emerson to report a flat gross margin at 42.1%. Adjusted earnings-per-share came in at $0.89, exceeding guidance of $0.79 to $0.83 for the quarter and representing a 7% year-over-year increase.

Despite the weak results to start 2020, Emerson is confident in its ability to withstand a recession. Emerson is particularly adept at cash flow generation, even when sales are flat or declining.

For example, in the most recent quarter Emerson generated operating cash flow of $588 million, up 10% year-over-year. Meanwhile, free cash flow of $477 million increased 15% versus the same quarter last year.

We also believe the company has positive long-term growth potential, thanks largely to its long history of growth and its global competitive advantages. Emerson’s competitive advantage is in its many decades of experience in building customer relationships and engineering excellence.

It has a global customer base that is seeing strong economic growth and that underlying sales tailwind should power its long-term growth. With a modest stock valuation, long-term growth potential, and an attractive 3.6% dividend yield, Emerson Electric is our fourth-best Dividend King right now.

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