This year have been particularly tumultuous, while many analyst referenced back to the global financial crisis of 2008, I believe times are not as bad as then. There had been many factors this year that caused markets globally to go on a roller-coaster ride. While Mr. Market usually responds erratically, even more so in recent times where volatility is at a all-times high, we should view it as more opportunities opening up.
1. China's slowdown
Firstly, the drastic slowdown in China's economy has caused a rippling effect throughout Asia, and to a lesser extent the US. ^STI crashed from a yearly high of 3,539 to 2,800 - a value not seen since 3 years back. Being one of the world's largest economy, a drop in imports will affect global markets especially that of the manufacturing sectors. This has caused many companies, especially Asian ones, to report lower earnings and gloomy forecasts. However, China's growth is still rather moderate and a slowdown is definitely to be expected given the fact that they have been growing at about 9% yoy for the past many years and also the gradual appreciation of the Yuan.
I do not believe that this particular factor would cause such a plunge in the STI, although much of the components of the STI draws part of their revenue from China. Being a relatively small market, a negative sentiment could easily result in overselling of equities, and investor sentiment do not seem to be recovering soon given that there are alternate markets for them to go to now (point 2.) On the bright side - if all the negative factors remain status quo - the fall seems to be bottoming out and slight market noise would not appear to bring it down much further. Long term monies could see themselves invested in a STI ETF or STI blue chips.
2. Fed's rates hike
Finally the rates have taken off since 2008 where it turned flat due to the global financial crisis. The road to recovery had been a rather slow but steady one. Many analyst have thrown their predictions about future rates, with some saying that it will soon go back to 0% while others see a gradual rate hike in years to come. Of course, many know that the reason for controlling the interest rate is to curb or promote inflation, the underlying factors that will ultimately determinate the interest rate is the economy itself. Should major companies start to report low earnings and slow growth, the fed would have no choice but to drop it to promote lending. However, if the economy really gets on track, then gradual rate hikes would not be a surprise. My knowledge is rather insufficient to predict the market's direction so I'm not going to bet on either way.
One point to note is that although the DJIA plunged nearly as hard as the STI, the DJIA have seemed to make a near-full recovery since their lowest in August, while the STI is still not far away from their year low. This stress test proved that the US market is rather strong at absorbing negative impacts. The increase in rates have opened up more opportunities for investors in terms of bonds returns. A sell-off in equities and a increased returns from bonds resulted in a double hit towards shareholders, but true investors would not be bothered by temporal influences and instead look at it as a bargain sale. However, for the more risk-adverse investors, bonds would not be a bad place to place monies in now - as a drop (if) in rates would cause existing bondholders to have even more profit, while should a gradual rate hike happen, one can always DCA into it - I don't think rates will climb much higher in the near future anyway.
3. Oil price crash
The drastic fall in oil prices would certainly have the same, if not much more, impact than the slowdown of China's GDP, although in one way or another they are so very intricately linked. Crude oil had seen prices of ~60 drop to a recent low of 36 - nearly half. This has caused many oil-related industries (save for those that buys oil of course) to experience massive losses and some filing for bankruptcy. OPEC has responded with falling oil prices by pumping even more oil out, with a few countries jumping in the production bandwagon (lol, what?!). This has caused companies that gains their revenue from oil companies - such as those who supply valves, tanks, indicators, etc. - to also report losses as they have reduced sales and stuff.
The extremely volatility in oil prices was also made worse by various financial institutions that peddles with oil derivatives, one of the factor that caused the previous oil crash. However, this could also mean that prices will never be too low, as investors would jump into buying oil and its derivatives even if they had nothing to do with oil at all.
Personally I shun commodities, companies which are dealing heavily with commodities and in a way cyclical stocks. They do not let me sleep in peace. When I buy into a company I expect to hold them for a loooooong time, thus for me to hold a share when it merely fluctuates between a ceiling and a floor doesn't make sense - that's would be the ideal stock for traders, though. This is different from market volatility which I do not mind.
==========================================================
Given all the points as discussed, I believe actions would take much more weight than talk, and that predicting the rain is useless without actually building the ark. However, I am still extremely risk adverse and as investors are all on their toes right now - jumping into action with every major news - I would enter bit by bit and be prepared to DCA into dropping markets. The chance of profitability is quite high now should one throw in the entire pot and the bear reverses - but nah.
With the increase in rates, corporate bonds ETFs* would seem like a good place to start with as their returns are increased and bonds are also generally less volatile than equities. I will also buy into high cap companies* providing decent dividend yields given the fact that the market crash have brought yields to yearly highs. Should a capital appreciation take place there will be more profits to be seen too.
In the inevitable (I don't mean to sound like a fortune-teller sorry) future that oil prices rise, even if the Fed and China stays status quo, companies that are hit the most now would be those that see the most profits, and if it is high enough the Fed should also hike raise accordingly. When that happens, existing shares bought now at their rather low prices could see a substantial capital appreciation and also dividend yields (compared to prices that shares were bought at). However, one should still be prepared for markets going further south as prices ultimately depend on investors sentiment, even though intrinsic value is what we should be investing in.
"Price is what you pay, value is what you get"
P.S. Yes I know about the Europe crisis but I am not particularly interested in that.
Disclaimer: Information may not be totally accurate, most of it are from memory and basic referencing. This post is not meant for solicitation of funds of any kind, well this is not even an advertisement. This post is also not suggesting you to do anything at all, so if you're on your bed reading this, stay on your bed. The author holds no liabilities for any incident that arise be it loss of profit, capital, consciousness, limbs or organs.
Wednesday, December 23, 2015
Sunday, December 13, 2015
Emerson electric (NYSE: EMR)
The business
http://finance.yahoo.com/q/hp?s=EMR
Emerson electric is a American multinational corporation that is founded over 100 years ago. It is hailed as one of the dividend kings that has indisputable reputation for dividend payouts and have not stopped any payments consecutively and even increased their dividends payout for 59 years. Their businesses are largely categorized as:
• Process Management - provides measurement, control and diagnostic capabilities for automated industrial processes producing items such as fuels, chemicals, foods, medicines and power.
• Industrial Automation - brings integrated manufacturing solutions to diverse industries worldwide.
• Network Power - provides power conditioning and reliability, and environmental control to help keep telecommunication systems, data networks and other critical business applications operating continuously.
• Climate Technologies - enhances household and commercial comfort, as well as food safety and energy efficiency, through heating, air conditioning and refrigeration technology.
• Commercial & Residential Solutions - provides tools for professionals and homeowners, residential storage systems and appliance solutions.
Source: EMR2015 - 10k filing.
While having a diversified portfolio helps to reduce risk of a crash of a single asset class, similarly they are unable to profit from a great boost in any one of them. However, with the recent turmoil in the economy, personally I would choose a reduction in risk over a chance of massive growth. Having huge capitalization also allows them to maintain their durable competitive advantage.
Although the company is involved in various aspects of manufacturing, they are ultimately under manufacturing, and a large aspect of manufacturing is oil. Thus oil prices will always have a impact on Emerson although to a much lesser extent than O&G companies.
A couple years ago until rather recently, their high share prices of 60-ish have caused the yield to hover around 2.5% but with the more recent stock market slump mid 2015, their current price of 47.83 have brought yield up to nearly 4%*. Let's proceed to some analysis, where I will go through several factors of importance one by one.
*As of writing, I usually write my articles over a period of time and thus there might be price inconsistencies throughout.
1) Gross profit margin:
In this case, gross profit might be labelled net profit in some other reports, but to clarify, gross profit margin mentioned above takes into consideration cost of sales, SGA and interests paid. Basically the margin shown is the margin of cash the company earns, with nothing much to deduct anymore.
There is a definite downtrend to be observed, but the rather substantial rise in profit margin signals me that the management is doing things right. Given the fact that revenue increased instead from 2010 to 2013, the drop in profit margins might be caused by some other factors instead of poor sales and fierce competition. Digging through financial statements, it is seen that 'In the fourth quarter of 2012, the Company’s annual goodwill impairment... As a consequence, the carrying value of these businesses
was reduced by a noncash, pretax charge to earnings totaling $592 ($528 after-tax, or $0.72 per share).'
The company spent quite a copious amount of money for acquisitions in 2012 which didn't bring back expected profits or 'fair value'. The money that the company paid that exceeds returns are goodwill impairment, which takes up a sizable chunk of 2012's gross profit margin. Since then (i believe) management has seemed to be making wiser acquisition choices, as profit margins are slowly rising in a falling market (2013 - 2015).
Comparatively, General Electric's gross profit margin of average 13.43% over the past 5 years could signal that Emerson might not be spending money as wisely as another company in the similar field. However, the fact that Emerson deals in a extremely huge array of industries might cause this comparison to be rather useless. We will then take a look at how similar industries fare up:
Machinery - 10.90%
2) EPS
http://finance.yahoo.com/q/hp?s=EMR
Emerson electric is a American multinational corporation that is founded over 100 years ago. It is hailed as one of the dividend kings that has indisputable reputation for dividend payouts and have not stopped any payments consecutively and even increased their dividends payout for 59 years. Their businesses are largely categorized as:
• Process Management - provides measurement, control and diagnostic capabilities for automated industrial processes producing items such as fuels, chemicals, foods, medicines and power.
• Industrial Automation - brings integrated manufacturing solutions to diverse industries worldwide.
• Network Power - provides power conditioning and reliability, and environmental control to help keep telecommunication systems, data networks and other critical business applications operating continuously.
• Climate Technologies - enhances household and commercial comfort, as well as food safety and energy efficiency, through heating, air conditioning and refrigeration technology.
• Commercial & Residential Solutions - provides tools for professionals and homeowners, residential storage systems and appliance solutions.
Source: EMR2015 - 10k filing.
While having a diversified portfolio helps to reduce risk of a crash of a single asset class, similarly they are unable to profit from a great boost in any one of them. However, with the recent turmoil in the economy, personally I would choose a reduction in risk over a chance of massive growth. Having huge capitalization also allows them to maintain their durable competitive advantage.
Although the company is involved in various aspects of manufacturing, they are ultimately under manufacturing, and a large aspect of manufacturing is oil. Thus oil prices will always have a impact on Emerson although to a much lesser extent than O&G companies.
A couple years ago until rather recently, their high share prices of 60-ish have caused the yield to hover around 2.5% but with the more recent stock market slump mid 2015, their current price of 47.83 have brought yield up to nearly 4%*. Let's proceed to some analysis, where I will go through several factors of importance one by one.
*As of writing, I usually write my articles over a period of time and thus there might be price inconsistencies throughout.
1) Gross profit margin:
year
|
revenue
|
% (Gross profit margin)
|
2010
|
21,039
|
10.54%
|
2011
|
24,222
|
10.45%
|
2012
|
24,412
|
8.29%
|
2013
|
24,669
|
8.37%
|
2014
|
24,537
|
8.90%
|
2015 (adjusted)
|
22,304
|
9.79%
|
In this case, gross profit might be labelled net profit in some other reports, but to clarify, gross profit margin mentioned above takes into consideration cost of sales, SGA and interests paid. Basically the margin shown is the margin of cash the company earns, with nothing much to deduct anymore.
There is a definite downtrend to be observed, but the rather substantial rise in profit margin signals me that the management is doing things right. Given the fact that revenue increased instead from 2010 to 2013, the drop in profit margins might be caused by some other factors instead of poor sales and fierce competition. Digging through financial statements, it is seen that 'In the fourth quarter of 2012, the Company’s annual goodwill impairment... As a consequence, the carrying value of these businesses
was reduced by a noncash, pretax charge to earnings totaling $592 ($528 after-tax, or $0.72 per share).'
The company spent quite a copious amount of money for acquisitions in 2012 which didn't bring back expected profits or 'fair value'. The money that the company paid that exceeds returns are goodwill impairment, which takes up a sizable chunk of 2012's gross profit margin. Since then (i believe) management has seemed to be making wiser acquisition choices, as profit margins are slowly rising in a falling market (2013 - 2015).
Comparatively, General Electric's gross profit margin of average 13.43% over the past 5 years could signal that Emerson might not be spending money as wisely as another company in the similar field. However, the fact that Emerson deals in a extremely huge array of industries might cause this comparison to be rather useless. We will then take a look at how similar industries fare up:
Electrical Equipment -11.71%
Electronics
(General) - 8.11%Machinery - 10.90%
Not so bad.
2) EPS
An extremely major factor in deciding share prices, earnings-per-share is a strong indicator that can attract or spook investors at first sight. Let's see Emerson's.
year
|
EPS (diluted)
|
2010
|
2.84
|
2011
|
3.27
|
2012
|
2.67
|
2013
|
2.76
|
2014
|
3.03
|
2015 (adjusted)
|
3.161
|
While the company forecasts annual growth of 3-5% of underlying net sales annually, 2015 is the first year that the company forecasts a drop of net sales by 6-8% for 2016. Given the time at which the 10K is filed, oil prices have went further south and a gloomier forecast might be in place. However, given the highly diversified holdings under Emerson, it would not be impossible for them to shift their earning capacity further away from O&G industries. They also have a rich history of acquisition and divestitures depending on profitability of certain sectors. Given the fact that Emerson managed to cling onto the lifeline in the several oil crisis in 2003 and 2008 where prices are around current levels, I think EMR is well experienced in dwindling oil prices and this would not hit them as hard.
Furthermore, in FY2015 oil prices are a steep drop - nearly 50% - off FY2014 prices, and yet EMR managed to report strong EPS, displaying their resilience and strong footing as a large corporation. The decent EPS might also be caused by large share buybacks of EMR, which will be discussed later on.
Un-adjusted EPS is actually $3.99, a steep growth from 2014, but given that it is a one time gain I took that out, but one should still not completely ignore it. EPS doesn't look that bad here, taking the rocky economy into consideration.
3) Cash and CE
While they are constantly buying and selling businesses, EMR is stocking up on a healthy amount of cash in case of economy downturns (ding ding ding its happening right now). Its always good to see a company which doesn't squander away all their money in pursuit of heated expansion during good years and always be ready for the rainy season. It is also not to say that they are cash hoarders as proven on their massive share buybacks. Pretty good money usage.
4) Assets & Liabilities
A bigger group that cash and CE is in, assets paint a much bigger picture of what the company has and what the company owes. Its rather self-explanatory.
While there isn't much growth to speak of, their current liabilities are increasing at a pretty quick pace, this seems like non-current liabilities are reaching maturity as their total liabilities are pretty much maintained. The current ratio is still steady at 1.28, while their debt ratio is decent at 0.63. So long as the company doesn't take on increasing debt in a falling economy they should be able to service them and tide the crisis over.
Since investors are very cautious about buying into a debt-laden company (or one that could be), debt ratios are important to us as we do not want a seemingly bustling company fall into bankruptcy because of excessive leverages. For a manufacturing corporation like EMR, a debt ratio of 0.63 indicates that for each dollar of asset they have, 63 cents of it is financed by debt. The industry average for manufacturing companies is 0.7 - so EMR is doing fairly well.
Taking a look at how strong are they at servicing debts, the 10-K shows a good ratio of 21.8X, giving us a interest payment of only about 4.5% of sales, even in event where sales dropped by half, they are still more than capable of handling their debt payments. For FY2015, 23% of their net earnings is paid as interest, it is high but still very manageable.
Operating Cash Flow-to-Debt Ratio 37.0%
Interest Coverage Ratio 21.8X
Interest paid / net earnings : 23.08%
I believe that the company wouldn't buckle anytime soon, we can instead take falling assets/increasing debts as a chance to acquire some bargain shares as other investors are spooked away by it.
5) Return on Equity
Personally I am a great fan of share buybacks, admittedly I might have placed a much larger emphasis on share buybacks for a company than many others, but that's just by bias. Why?
For a company issuing dividends as a way of rewarding shareholders, it has been so taken for granted that shareholders throw a tantrum and start a selloff should payments be interrupted or even reduced. Therefore companies which have a long history of dividends are unable to increase payouts in a good year, lest they invoke the wrath of the market during bad years where they have to reduce it. In a way, for most companies dividends distribution is on a 'no choice' basis.
Share buybacks on the other hand, can be triggered as and when the company feels suitable to do so. These are often regarded as a positive move by the company to increase shareholders value, by buying back shares from the market during bad years, the company can also increase profitability by having to share profits with lesser investors in the future. For a company to be giving money back to shareholders on their own will is something I regard very highly in. As we can see above, even in a falling economy, EMR used their funds to increase RoE from a would-be 20% to 27% by massive share buybacks.
It could also signal that the management knows in a bad year, monies should not be used for expansion as there is no need to increase production with falling demand. They are also not just mindlessly hoarding more and more money with no plans on what to do with it. IMO, signs signifying good decisions by management always outweighs any current numerical data or technicals.
6) Dividends
The factor where EMR has built a solid reputation on. One aspect where the company performed admirably is that they managed to maintain solid dividends payout even in bad years, something badly managed companies could never achieve. Maintaining a decent amount of leveraging also helps towards this. EMR has a 59 year of consecutive dividend payout increment, that's a really impressive record. Adding to the fact that this 59 years is riddled with several worldwide shocking financial events:
https://en.wikipedia.org/wiki/1970s_energy_crisis [1970s]
https://en.wikipedia.org/wiki/Black_Monday_%281987%29 [1987]
aaaaaaaand.............
Paying dividends is one thing, but paying it sustain-ably and reasonably is another. It's pointless for a company to continue paying dividends if they are increasingly getting in debt or having no profit in order to do so (although in that case it would be impossible to do for over 50 years, but still). Regarding that we can take a look at their dividend payout margin. During the bad years:
It's a good thing that EMR is keeping their margin relatively low in bustling years, thus giving them ample cushion to handle economic downturns. As we can see above, their payout margin increased nearly 20% after the 2008 crisis, although I do not understand why they chose to still increase the payout. This move is like their management throwing out a poster to the entire corporate world saying 'that's how we roll'. Anyway they are cool.
After increasing payout margin in bad years, it would only make sense for management to bring the margin lower in better times to prepare for the next crisis, which brings us to now.
We can see a evident effort of lowering the margin in 2010-2011, but with the stark decline in earnings post-2011 ..
..the margin went back up again to 60%. Still not that bad, seeing that they have been through it before, in even worse times. I would believe that they can continue their dividend streak a long time in the future. However, their rather stubborn habit of increasing payouts is slightly irking me as it is starting to look like they are giving more than they can afford to. I wouldn't mind if they only started to increase payouts after lowering their margin back to the 40% area, but I am sure with their entire group of management their reasoning behind these actions would be infinitely better than my simple opinions.
The yield of the stock in recent years has been fluctuating very widely, from 2.53% in 2013 to 4.26% this year. This is mainly due to investors sentiment pushing the prices of the share up high when the market is good, and having a massive sell-off now. I believe the situation right now nicely displays Graham's Mr. Market, and a yield of over 4% with a strong dividend history company does seem to be a good time to enter.
Taking into account that once oil prices and investors sentiment improves, share price appreciation could net some decent profit into the future. Even if that doesn't happen soon, so long as EMR continues with its tradition of distribution, the risk margin is not that deep.
Fin. *********************
I may post a part 2 describing more qualitative analyses of the company but given that most of them I did is rather subjective and existing only in my head, this article highlights the important factors that I can refer to next time after buying the stock.
Note: Non-US citizens are liable for a 30% income tax by the federal government of the USA. That includes dividends.
Furthermore, in FY2015 oil prices are a steep drop - nearly 50% - off FY2014 prices, and yet EMR managed to report strong EPS, displaying their resilience and strong footing as a large corporation. The decent EPS might also be caused by large share buybacks of EMR, which will be discussed later on.
Un-adjusted EPS is actually $3.99, a steep growth from 2014, but given that it is a one time gain I took that out, but one should still not completely ignore it. EPS doesn't look that bad here, taking the rocky economy into consideration.
3) Cash and CE
year
|
Cash and CE
|
2011
|
2,052
|
2012
|
2,367
|
2013
|
3,275
|
2014
|
3,149
|
2015
|
3,054
|
While they are constantly buying and selling businesses, EMR is stocking up on a healthy amount of cash in case of economy downturns (ding ding ding its happening right now). Its always good to see a company which doesn't squander away all their money in pursuit of heated expansion during good years and always be ready for the rainy season. It is also not to say that they are cash hoarders as proven on their massive share buybacks. Pretty good money usage.
4) Assets & Liabilities
A bigger group that cash and CE is in, assets paint a much bigger picture of what the company has and what the company owes. Its rather self-explanatory.
year
|
Total Current assets
|
Total
non-current assets (less PPE)
|
Total assets
|
Current
Ratio
|
2011
|
9,345
|
11,079
|
23,861
|
1.445475638
|
2012
|
10,126
|
10,183
|
23,818
|
1.419599047
|
2013
|
10,999
|
10,107
|
24,711
|
1.442491803
|
2014
|
10,867
|
9,508
|
24,177
|
1.285427017
|
2015
|
10,049
|
8,454
|
22,088
|
1.288333333
|
year
|
Total current liabilities
|
Long-term debt
|
Total non-current
liabilities
|
Total liabilities
|
2010
|
-
|
-
|
-
|
-
|
2011
|
6,465
|
4,324
|
6,845
|
13,310
|
2012
|
7,133
|
3,787
|
6,243
|
13,376
|
2013
|
7,625
|
4,055
|
2,313
|
13,993
|
2014
|
8,454
|
3,559
|
5,556
|
14,010
|
2015
|
7,800
|
4,289
|
6,160
|
13,960
|
While there isn't much growth to speak of, their current liabilities are increasing at a pretty quick pace, this seems like non-current liabilities are reaching maturity as their total liabilities are pretty much maintained. The current ratio is still steady at 1.28, while their debt ratio is decent at 0.63. So long as the company doesn't take on increasing debt in a falling economy they should be able to service them and tide the crisis over.
Since investors are very cautious about buying into a debt-laden company (or one that could be), debt ratios are important to us as we do not want a seemingly bustling company fall into bankruptcy because of excessive leverages. For a manufacturing corporation like EMR, a debt ratio of 0.63 indicates that for each dollar of asset they have, 63 cents of it is financed by debt. The industry average for manufacturing companies is 0.7 - so EMR is doing fairly well.
Taking a look at how strong are they at servicing debts, the 10-K shows a good ratio of 21.8X, giving us a interest payment of only about 4.5% of sales, even in event where sales dropped by half, they are still more than capable of handling their debt payments. For FY2015, 23% of their net earnings is paid as interest, it is high but still very manageable.
Operating Cash Flow-to-Debt Ratio 37.0%
Interest Coverage Ratio 21.8X
Interest paid / net earnings : 23.08%
I believe that the company wouldn't buckle anytime soon, we can instead take falling assets/increasing debts as a chance to acquire some bargain shares as other investors are spooked away by it.
5) Return on Equity
year
|
shares issued ( 0 pref)
|
Return on Equity
|
Shareholder Equity
|
2011
|
738.87777
|
24.33%
|
10,399
|
2012
|
724.11329
|
19.38%
|
10,442
|
2013
|
706.66026
|
19.28%
|
10,718
|
2014
|
696.60522
|
21.58%
|
10,119
|
2015
|
654.60852
|
27.03%
|
8081
|
Personally I am a great fan of share buybacks, admittedly I might have placed a much larger emphasis on share buybacks for a company than many others, but that's just by bias. Why?
For a company issuing dividends as a way of rewarding shareholders, it has been so taken for granted that shareholders throw a tantrum and start a selloff should payments be interrupted or even reduced. Therefore companies which have a long history of dividends are unable to increase payouts in a good year, lest they invoke the wrath of the market during bad years where they have to reduce it. In a way, for most companies dividends distribution is on a 'no choice' basis.
Share buybacks on the other hand, can be triggered as and when the company feels suitable to do so. These are often regarded as a positive move by the company to increase shareholders value, by buying back shares from the market during bad years, the company can also increase profitability by having to share profits with lesser investors in the future. For a company to be giving money back to shareholders on their own will is something I regard very highly in. As we can see above, even in a falling economy, EMR used their funds to increase RoE from a would-be 20% to 27% by massive share buybacks.
It could also signal that the management knows in a bad year, monies should not be used for expansion as there is no need to increase production with falling demand. They are also not just mindlessly hoarding more and more money with no plans on what to do with it. IMO, signs signifying good decisions by management always outweighs any current numerical data or technicals.
6) Dividends
The factor where EMR has built a solid reputation on. One aspect where the company performed admirably is that they managed to maintain solid dividends payout even in bad years, something badly managed companies could never achieve. Maintaining a decent amount of leveraging also helps towards this. EMR has a 59 year of consecutive dividend payout increment, that's a really impressive record. Adding to the fact that this 59 years is riddled with several worldwide shocking financial events:
https://en.wikipedia.org/wiki/1970s_energy_crisis [1970s]
https://en.wikipedia.org/wiki/Black_Monday_%281987%29 [1987]
aaaaaaaand.............
- Early 2000s recession
- Late-2000s Financial Crisis or the Late-2000s recession, including:
- Greek government-debt crisis
- 2014 Russian financial crisis
- 2015 Chinese stock market crash
Paying dividends is one thing, but paying it sustain-ably and reasonably is another. It's pointless for a company to continue paying dividends if they are increasingly getting in debt or having no profit in order to do so (although in that case it would be impossible to do for over 50 years, but still). Regarding that we can take a look at their dividend payout margin. During the bad years:
|
Year
|
EPS
|
Dividends
paid
|
payout
margin
|
|
2007
|
2.66
|
1.05
|
39.47%
|
|
2008
|
3.06
|
1.2
|
39.22%
|
|
2009
|
2.27
|
1.32
|
58.15%
|
It's a good thing that EMR is keeping their margin relatively low in bustling years, thus giving them ample cushion to handle economic downturns. As we can see above, their payout margin increased nearly 20% after the 2008 crisis, although I do not understand why they chose to still increase the payout. This move is like their management throwing out a poster to the entire corporate world saying 'that's how we roll'. Anyway they are cool.
After increasing payout margin in bad years, it would only make sense for management to bring the margin lower in better times to prepare for the next crisis, which brings us to now.
|
year
|
Dividends
paid
|
payout
margin
|
yield
|
|
2010
|
1.35
|
47.54%
|
2.56%
|
|
2011
|
1.435
|
43.88%
|
3.47%
|
|
2012
|
1.61
|
60.30%
|
3.34%
|
|
2013
|
1.64
|
59.42%
|
2.53%
|
|
2014
|
1.72
|
56.77%
|
2.75%
|
|
2015
|
1.88
|
59.47%
|
4.26%
|
We can see a evident effort of lowering the margin in 2010-2011, but with the stark decline in earnings post-2011 ..
|
year
|
Net earnings
|
|
2010
|
2,217
|
|
2011
|
2,530
|
|
2012
|
2,024
|
|
2013
|
2,066
|
|
2014
|
2,184
|
|
2015 (adjusted)
|
2,184
|
..the margin went back up again to 60%. Still not that bad, seeing that they have been through it before, in even worse times. I would believe that they can continue their dividend streak a long time in the future. However, their rather stubborn habit of increasing payouts is slightly irking me as it is starting to look like they are giving more than they can afford to. I wouldn't mind if they only started to increase payouts after lowering their margin back to the 40% area, but I am sure with their entire group of management their reasoning behind these actions would be infinitely better than my simple opinions.
The yield of the stock in recent years has been fluctuating very widely, from 2.53% in 2013 to 4.26% this year. This is mainly due to investors sentiment pushing the prices of the share up high when the market is good, and having a massive sell-off now. I believe the situation right now nicely displays Graham's Mr. Market, and a yield of over 4% with a strong dividend history company does seem to be a good time to enter.
Taking into account that once oil prices and investors sentiment improves, share price appreciation could net some decent profit into the future. Even if that doesn't happen soon, so long as EMR continues with its tradition of distribution, the risk margin is not that deep.
Fin. *********************
I may post a part 2 describing more qualitative analyses of the company but given that most of them I did is rather subjective and existing only in my head, this article highlights the important factors that I can refer to next time after buying the stock.
Note: Non-US citizens are liable for a 30% income tax by the federal government of the USA. That includes dividends.
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