Emerson Electric: What Future Dividend Growth Could Look Like
Apr. 3, 2015 4:30 AM • emr
- Emerson Electric has provided total dividend and share repurchase guidance through 2019.
- While this is useful information, it is not broken out by year, and thus leaves the potential investor having to do some speculating.
- This article looks at what the company's future dividend growth might look like, and what this would mean for total return expectations.
Emerson Electric (NYSE:EMR ) has not only paid, but increased its dividend for 58 consecutive years. Over the past 10 years, this payout has increased by an annual rate of roughly 8.5%. During the last half decade, the dividend has increased by a yearly mark of 7%. Most recently, the company raised its payout by 9.3%, from $0.43 per quarter to $0.47. Given this information, it would be fair to suggest that management has the propensity to increase its payout moving forward. Not assured, mind you, but an inclination to boost the dividend nonetheless.
Of course, the growth of the past doesn't exactly help the investor or prospective investor of today. A more pressing concern is what might occur in the coming years and decades. Granted, no one can know what will occur for certain, but we do have some clues as to what management sees as a possibility. Let's look at the next five years as an arbitrary timeline and see if we can glean some information.
In a recent presentation. the company provided broad dividend and share repurchase guidance through 2019. Specifically, Emerson Electric expects to use $7 billion towards dividend payouts and $6 billion toward share repurchases - targeting a 50-60% operating cash flow payout ratio. As a comparison, the company spent $3.6 billion on dividends and $3 billion on share repurchases during the 2011 through 2014 period. In other words, the new time period is a bit longer, and the amount going back to shareholders is expected to roughly double.
Emerson Electric has a history of increasing its dividend at the end of the calendar year - the beginning of the company's fiscal year. Thus far, the company has made two $0.47 quarterly dividend payments. In turn, you could logically expect two more payments through September of this year. Afterwards, an increase appears likely. So, for the upcoming twelve months, you would anticipate two $0.47 payments, followed by two higher payments. Let's see if we can come up with a baseline for future increases.
First, we'll set the stage. During 2013 and 2014, Emerson Electric paid out roughly $1.2 billion in total dividends. Seven billion divided by five years equates to a $1.4 billion yearly average for total dividends. Six billion in anticipated share repurchases means an expectation of $1.2 billion per year towards the endeavor of reducing share count. Of course, these numbers likely won't be linear, but they nonetheless offer some perspective. As of the last quarterly report, Emerson Electric had 695 million shares outstanding .
Now we're ready to begin thinking about the per share dividend payments. You would anticipate two more $0.47 quarterly payouts. With 695 million shares outstanding, these two payments will cost the company about $650 million (or less, depending on share count reduction). In order for the company to reach $1.4 billion in total dividend payments for the year, Emerson Electric would need to increase the per share dividend to roughly $0.54 (or more) per quarter - a 15% increase.
This is possible, but perhaps not altogether prudent to expect, especially given the idea that it doesn't account for a reduction in outstanding shares. As a result Emerson Electric might "only" spend $1.3 billion or so on dividends during the next year, resulting in a per share increase to, say, $0.50 per quarter. In
turn, this would indicate $1.94 in per share dividend payments for the next twelve months.
From here, we can continue the process. Assuming $1.2 billion per year in share repurchases, the total share count might be reduced by 20 million shares or so to start, and then decrease from there. By the end of 2019, it's not unimaginable that Emerson Electric will only have 600 million shares outstanding, or thereabouts.
Additionally, we could expect the total amount of dividends paid to increase slightly over the years - say, from $1.3 billion this year to $1.5 billion by 2019. Using these two numbers, we come to a 2019 per share dividend of $2.50 per share. On an annualized basis, this would indicate 6.5% yearly dividend growth - well within the company's recent history and expected intermediate-term growth rate. On a comparable basis, the company expects to earn $5.50-6 per share during 2019. The $2.50 expected dividend would equate to a 44% payout ratio using the midpoint of these numbers. In other words, this seems like a reasonable baseline.
Here's what the next five years of dividends could look like, using consistent growth:
- Year 1 = $1.94
- Year 2 = $2.07
- Year 3 = $2.20
- Year 4 = $2.35
- Year 5 = $2.50
Now, obviously, the actual dividends paid might vary markedly from these numbers, but they nonetheless provide a starting point. In total, you might expect to collect just over $11 per share in dividend payments during the next five years, or roughly 20% of your initial capital outlay, based on today's prices.
From here, you can also compute expected returns based on future dividend yields. With a share price around $56 and a $1.88 assumed annual dividend, this equates to a 3.35% "current" dividend yield. If the company were to continue to trade at this rate in the future, that $2.50 dividend would indicate an expected price around $75. Add in $11 in dividends, and you come to an anticipated total return of roughly 9% per year.
Of course, the future dividend yield might be higher or lower than it is today. With a 3.8% future yield, and the same assumed dividend payments, this would indicate 6.5% annual total returns. Meanwhile, a 2.8% future yield would translate to 12% anticipated total yearly gains.
In short, no one knows exactly what's in store for Emerson Electric in the coming years. Nevertheless, we can glean a variety of information. Management has been helpful in that they have said that they expect to spend $7 billion on dividends and $6 billion on share repurchases through 2019. Yet, the message is somewhat cryptic in that we don't know exactly when either might occur. The above procedure is how I would begin to think about the process.
If the company were to use $7 billion towards dividends without repurchasing any shares, this would mean roughly $10 in per share dividends. Alternatively, if Emerson Electric simultaneously reduces its share count, this could mean $11 or more in dividends received - not to mention higher per share earnings. Given a reasonable future dividend yield, you might also expect total returns to be in the 7-12% range, with 9% as your baseline. Time will tell whether or not these assumptions come to fruition, but investors can look forward to the company narrowing in on the 60-year dividend increase mark.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.