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Emerson Electric Co. (EMR) Is a Solid Pick Among Diversified Industrial Stocks

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Emerson Electric Co. (NYSE:EMR)Diversified industrial companies reflect the development of the world economy. Such companies’ products impact every area of the world and every end market. Last year, their organic revenues steadily slowed down, as these companies grew in a continuous but slow manner in the U.S., while the European market was largely negative. Still, the first quarter of the year, which saw increased stabilization, showed that demand is not headed for the bottom.

Revenues and earnings were expected to keep advancing in the beginning of the new fiscal year. This indicates that ongoing revenues and earnings are not being held back by the current slow growth environment. Companies were expected to generate average Earnings Per Share (EPS) growth at a rate of 11.2% in fiscal 2013. This, if it occurs, reflects outsize earnings growth from the previous meager growth rates.

It is still possible that this projection could be revised down–that happened last year. Nevertheless, on the whole, the EPS of these companies will most likely improve. Factors pushing EPS in that direction include aggressive share repurchase programs, growth from acquisitions, and cost savings from restructuring.

In this article, I focus on Emerson Electric Co. (NYSE:EMR), a stock that should be considered for its potential to return significant profits.

Business Model

Emerson Electric Co. (NYSE:EMR) is a diversified industrial stock that designs and supplies products and technology and delivers engineering services. The company has four main business segments: Industrial Automation, Network Power, Climate Technologies and Commercial & Residential Solutions.

Due to recent volatile economic conditions, Emerson Electric Co. (NYSE:EMR) is not making any massive capital expenditures at present. At the end of Q1, its capital expenditure stood at only $115 million.  At the same time, the company is investing only in key strategic programs to make sure that it will be well-positioned when global economic growth picks up the pace.

Dividend Profile

Emerson Electric Co. (NYSE:EMR) has a long history of dividend payments. At present, Emerson offers a quarterly dividend of $0.41 cents per share. For the full year of 2012, it paid a dividend of $1.60 per share, which is up from $1.435 per share in 2011. As shown in the below table, Emerson has been consistently increasing its dividends. In the past five years, it has raised its dividend by 36.67%.

Year Dividend
2012 $1.61
2011 $1.435
2010 $1.35
2009 $1.325
2008 $1.23

Morningstar.com

Financial Analysis

All of its four business segments are generating solid returns. At the end of Q1, it had been able to expand its revenue by 5% to $5.6 billion. On average, in the past three years, it has enlarged revenues by 6.7% while the industry average stood at a negative 0.4%. Additionally, it has shown solid margins while converting sales into earnings. As an indication of its solid margins, at the end of Q4, its Earnings Before Interest and Taxes [EBIT] margin stood at 13.1% and improved by 160 basis points.

After a modest year, the company has shown exceptional growth in its cash flows. At the end of Q1, its operating cash flow stood at $554 million, representing an increase of 66% over the past year. Its operating cash flows were expanded mainly due to high earning and lower working capital growth.

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