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2015 has not been a great year for the stock market. The S&P 500 index is down 1% so far this year, as investors grapple with a number of headwinds, including the strengthening U.S. dollar and slowing economic growth in the emerging markets.
But underneath the scary headlines, the best U.S. corporations continue to do what they have always done: pay dividends to shareholders. Some have continued to raise dividends this year, which is a testament to their strong underlying businesses.
On Nov. 3, Emerson Electric (NYSE: EMR) raised its dividend to $1.90 per share annualized. This represents the 59th year in a row that Emerson has increased its dividend. This is an amazing streak that speaks to the strength of its business, despite its current hardships.
Emerson’s Challenging Year
Emerson recently wrapped up its fiscal year 2015, and the results were not very good. Net sales declined 9% to $22.3 billion, while earnings per share, adjusted for divestiture gains, declined 15% for the year. Currency continues to be a big challenge. Foreign exchange fluctuations shaved off 5% from revenue growth last year.
Low oil prices also challenged the company. Two of Emerson’s biggest operating divisions, process management and industrial automation, service the oil and gas markets. Net sales excluding currency in these two areas fell 10% and 12%, respectively, last quarter.
The problem is that when commodity prices fell off a cliff earlier this year, oil and gas companies quickly cut capital expenditures to adjust to the new normal. This has rippled through the industry to companies like Emerson, which is seeing orders decline.
That’s why Emerson sees 2016 revenue declining another 6% to 8%. The hope is that commodity prices are near a bottom and that will spur a recovery in industrial demand toward the back half of 2016.
Still, while Emerson’s revenue and profits are declining, the company continues to generate cash flow. This is what fuels its impressive dividend payments. Emerson still raked in $1.8 billion of free cash flow in fiscal 2015. The company’s dividend cost $1.2 billion for the year.
As a percentage of free cash flow, Emerson’s dividend payout ratio remains a healthy 67%. Clearly, Emerson can afford its dividend, as well as a modest increase in the dividend each year, even if economic conditions deteriorate.
Short-Term Challenges Will Fade
As a major industrial company, Emerson is getting hit hard by the rising U.S. dollar and the collapse in commodity prices. Emerson heavily caters to the oil and gas markets. This has weighed on its earnings, and in response, the stock has lost 21% of its value so far this year.
But it’s important to remember that high-quality businesses can stand the test of time. Emerson is a perfect example. This year, Emerson Electric is celebrating its 125th anniversary as a company. This places Emerson in elite company, and demonstrates that its business model has stood the test of time. Over that long of a period, it’s clear that many hardships have come and passed. Through it all, Emerson is still standing. This is a useful reminder for the challenging times Emerson currently finds itself in.
An Electric Dividend Stock You Can Count On
This is not an easy time to be an industrial company, and Emerson’s earnings reports have borne the brunt. But while the company’s revenue and earnings are in decline, much of this is due to currency headwinds. Underlying demand for Emerson’s products and services continues to show resilience, even in a brutal operating environment.
That fundamental strength is what allowed Emerson to increase its dividend for the 59th consecutive year. The stock now yields 4%, which is an attractive yield in today’s low-rate climate. As a result, income investors can continue to bank on the Emerson Electric dividend.
To discover more income stocks that will keep the lights on through thick and thin, click here.