Emerson is one of the first stocks I bought back in 2015. The reason I really liked this stock is because it was out of favour due to marco economic headwinds that where out of control of the company. In other words, if those macro economic headwinds changed in favour of the company we should be able to see some very nice growth. Besides that, the company is a dividend aristocrat with a great track record, so the investment can be considered reasonably safe.
It is expected that it takes a few years before the headwinds will start to turn in favour of the company, but since I am a long term buy and hold investor I can wait. In the meantime Emerson pays me a nice 4.14% YOC, above my average target yield of 4%. And the value of the stock has risen with roughly 20% since I bought the stock. So all in all, the investment seems pretty good for now. Still, the last quarterly report was not great and investors reacted with a decline of over 4% in one day on the stock price.
Here some figures from the reporting of the Emerson 3rd quarter results for 2016:
- Quarterly net sales of $5.1 billion decreased 7 percent, with underlying sales down 5 percent
- Reported earnings per share decreased 12 percent to $0.74.
- Adjusted earnings per share decreased 5 percent to $0.80 excluding ($0.06) for separation costs
As you can see the news is simply negative. I am always a fan of underlying sales growth because that factors out currency exchange rates. Sometimes they are negative, sometimes they are positive, but the company doesn’t have any influence on them. The underlying sales for Emerson are down 5% which is worrisome. The company states that they don’t expect an improvement until the 2nd half of 2017 due to a uncertain market due to economic and political conditions around the world.
The company expects reported sales for 2016 to be down 9 to 10%. I believe this is already factored in the price of today and with my purchase price and the dividend the company pays me we have to wait until marco economic headwinds change in favour of the company.
As most people familiar with the company will know Emerson is in a restructuring proces. On one hand they are trying to cut in costs to increase cash flow. On the other hand they are selling divisions so that they can better focus on the remaining parts of the company and mainly focus on more high margin parts of the business. In the Emerson 3rd Quarter report these business highlights are written as follow:
- Reached agreements to sell Network Power, Leroy-Somer and Control Techniques
- Improved cost structure resulting from restructuring actions supported the generation of $718 million of operating cash flow
As you can see the company is moving. I like the cost cutting since I think it’s good considering the circumstances the company faces at the moment. I’m not sure about the sales of business parts. Network Power was actually the only part of Emerson that grew last year and now they are selling it. I know that they want to focus on more high margin parts and that sounds good. But if this move is really the right one at this moment depends on what the company is going to do with the money they gathered from the sales.
Only the future can tell if what they are doing is right. On the other hand, the management has a proven track record of creating stock holder value, so we keep a positive attitude towards the company for now.
As you all know the company is a Dividend Aristocrat with a proven history of dividend raises. Even with current circumstances I don’t believe this will change any time soon. Dividends and dividend raises are important for the company and I’m confident they won’t slash the dividend.
Having said that, I also think the growth of the dividend will be minimal for the coming 1 or 2 years. Until the results will start to be better I think the company will only raise to please shareholders and maintain dividend aristocrat status. Therefore I don’t expect the 5% raise that I set as a target for my portfolio. I actually think the dividend raise will be the same as last year. A $ 0,005 raise per quarter, or $ 0,02 per year.
Emerson is facing some challenging headwinds. Some are out of it’s influence zone, but there are also challenges within the company. Emerson is changing it’s strategy and nobody knows at this point in time what this will bring for the future. I actually expect that the share price will get lower in the coming year. This could be a nice change to profit from the company in the long run. But since we don’t have a magic foresight we can only guess.
In the meantime I am collecting my dividends and I expect a small raise in March 2017.
What do you think of Emerson? Do you see the recent results as a threat or maybe as a buying opportunity? What do you think of the company in the long term?