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Should You Still Buy Emerson After Its 25% Rise Since August?

Back In August, I showed you 5 Reasons to Buy Emerson Electric?

Today, I give you an update on them and answer –Should You Still Buy Emerson After Its 25% Rise Since August?

Here’s a quick recap of why I said you should buy it back in August before we get to today’s article.  If you want to read the past article in full, use the link above.

Emerson Electric (EMR) is an industrial conglomerate that operates two major businesses.

  • Automation Solutions.
  • Commercial And Residential Solutions.

In the automation solutions segment Emerson sells HVAC and refrigeration products and services.  And it also produces products for the Industrial Internet of Things.

In other words, Emerson produces and sells necessary parts, products, and services to a huge range of industries so those jobs and machines function properly.

Without a company like Emerson many products we use every day wouldn’t work.

Think of air conditioning as one of those – AKA HVAC.

Based in St. Louis Missouri, Emerson is a $38.8 billion market cap Dividend King that pays a 3.2% dividend.

This is reason #1 to buy EMR to help your retirement portfolio in this time of crisis… It’s dividend.

EMR’s 3.4% Dividend

Over the last decade EMR’s paid out a total of $17.28 per share in dividends.

At today’s share count of 615 million shares, that’s equal to $10.63 billion paid out to shareholders in the last decade.

Plus, the dividends increased in the last 10 years from $1.34 per share to $1.98 per share as of this writing.  This is a total increase of 47.8% or an average increase of 4.8% per year.

And you should expect this to continue because Emerson is a Dividend King.

These rare companies meet the following criteria…

  • They’re a member of the S&P 500
  • They’ve increased their dividend for 50 consecutive years.

As of this writing there are only 29 Dividend Kings on Earth.  And Emerson is one of them.

This means you should expect Emerson to not only continue paying its dividend during this crisis.  But also, that it will continue increasing its dividend.

And it did so on June 10th, 2020 when it raised the dividend to $1.98 per share.

That increase now makes it 63 straight years Emerson has not only paid a dividend but raised it.

These dividend payments will help you earn cash if you take the money out.  Or by allowing you to buy more shares over time if you reinvest the dividends.

Both help you earn higher returns over time and will especially help during any prolonged economic issues like we’re dealing with today.

It can pay these ever-increasing dividends because it earns huge profits.  Which is reason #2 to buy EMR.

EMR’s Huge Profits

Over the last decade it earned an average operating income margin of 16.9% per year on average.

I look for anything above 10% on a consistent basis so EMR well surpasses this number.

Why 10%?

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 11.8% per year.

This is enormous.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.

EMR earns enormous profits that make it an incredibly safe investment.

These profits also allow it to continually reinvest in operations.  And to pay you a large and continually growing dividend as well.

But these profits also allow another layer of safety in the amount of debt the company has which is reason #3. 

EMR’s Low Debt Levels

With EMR being a multibillion company, you’d expect it to have debt.

And it does…  But its debt levels are extremely low compared to its profits and the equity in the company.  This makes EMR an even safer investment.

As of this writing its debt/equity ratio is 0.53.  I look to invest in companies with numbers below 1 on this metric.

Why?

Because the lower debt levels the company has means the lower chance it has of going bankrupt.  And this makes it a safer investment.

Another reason to consider buying Emerson is because of its lack of being affected by the coronavirus which is reason #4.

The Coronavirus Won’t Harm Emerson

Something people won’t stop paying for are necessary things to run their businesses or their homes.

In Emerson’s case things that run air conditioners and heating units in homes, refrigerators, freezers, etc.

They may stop paying their mortgages.

They may stop paying their credit card bills.

And they may stop paying for their vehicle loans.

But they won’t stop to fix these things unless necessary

This was proved out on August 4th, 2020 when Emerson released its most recent quarterly data where only fell 16% in the year to year quarterly period.

Gross margins only fell by 1.4%.

Cash flow increased by 2.9%.

And it’s only expecting sales to drop between 9% or 10% for the full year 2020.

This when many other companies’ businesses are coming to complete stops.

Because EMR’s sells products and services in necessary industries its performance will hold up well during this pandemic.  Even if it lasts for years.

This gives enormous stability to EMR in these highly uncertain times.  And it also means you should expect it to continue earning enormous profits and cash flows.

This means you should expect the large dividend payments to continue as well.

But what about its valuation?  Is it cheap? 

EMR Is Also Cheap

This is reason#5…

With the markets at or near all-time highs you’d expect a fantastic stock like EMR to be selling at an enormous valuation.

But it’s not.

As of this writing its P/E is 17.7.

Its P/CF is 12.1.

And its Forward P/E is 19.2.

On all these metrics I look to buy investments below 20 to consider them for investment.

And EMR’s current valuations falls below 20 which puts it into the cheap valuation category.

This means EMR stock offers you a margin of safety in investing terminology.

A margin of safety means you’re buying a safe investment… And this makes the investment even less risky.

Conclusion

If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to buy and earn income in your retirement portfolio – consider investing in Emerson Electric for the 5 reasons above.

***

This thesis to buy Emerson continued to play out on November 3rd, 2020 when it released its most up to date quarterly earnings report.

Revenue fell 8% in the year to year quarterly period to $4.6 billion.

While free cash flow rose 2% in the year to year quarterly period to $1.02 billion.

And it raised its dividend for the 64th consecutive year to keep its spot as a prestigious Dividend King.

These are stellar results that prove Emerson will continue doing well no matter how long this pandemic lasts.

And show why you should consider buying it to own for the long term.

But there’s now a problem with this… It’s no longer cheap enough to buy.

As of this writing its P/E is 23.6.

Its P/CF is 15.

And its Forward P/E is 22.

Due to its continued stellar results and dividend increases its shares have continued rising since I last told you to buy it back in August.

From $61.93 per share on August 4th to $77.75 per share as of this writing.

This 25.5% increase in share price since August has made Emerson now too expensive to buy.

For this reason of its now overvaluation – which makes owning its stock riskier – I still recommend you buy Emerson… But only when it’s cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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