A Diversified Industrials Giant With a Growing Dividend

Josh Aguilar: The stocks of multi-industrial companies are ideal places to park cash for active yield-seekers. In fact, five diversified industrial firms have continuously paid an annually increasing dividend for over 60 years. These include wide-moat 3M, narrow-moat Dover, wide-moat Emerson Electric, narrow-moat Parker Hannifin, and Stanley Black & Decker, which we don't cover. Of the four companies we do cover, at these prices we're most attracted to Emerson Electric, which trades at a 4-star rating. While we recommend a larger, wider margin of safety around the name, we do think it merits a place on an investor's watchlist.

Emerson currently pays out about a 2.7% yield and offers investors the potential for capital appreciation at today's prices. In our view, Emerson is the undisputed king of process automation on this side of the Atlantic. Process automation deals with materials like oil and chemicals, while discrete automation deals with automobiles or electronics. Emerson sells a number of award-winning products on the automation side, including flow meters, pumps, and valves. It also boasts a massive installed base with long-lived assets spanning over two decades. Secular long-term drivers for Emerson include less available skilled labor in the manufacturing world as well as the need for environmental and safety compliance.

Take, for example, Emerson's Coriolis flow meter. These flow meters measure mass flows of liquid and are widely used for custody transfer of petroleum liquids. While the capital cost of installing one of these flow meters is higher, the value proposition is that they lower customers' total cost of ownership. One specific use case is titanium dioxide, which is added to fine white paper to make it brighter and whiter. Using too much titanium dioxide means customers incur substantial incremental costs, while using too little will produce off-spec paper. Magnetic flow meters offered by competitors won't work for this specific use case because they're not accurate enough. Using one of these can result in a 15% rejection rate for being off-spec. But customers using a Coriolis flow meter interfaced with their control system can save a facility a meaningful amount of money--up to $250,000. The simplified spooling design doesn't require a complex installation and can support up to four individual flow transmitters and tolerate extreme temperature conditions. This allows for premium pricing relative to competitors.

With Emerson, investors are also getting a portfolio of climate control technologies and cold chain solutions, as well as tools and home products protected by well-known brands. The brands include Copeland compressors, InSinkErator food dispensers, and Ridgid tools, which you can find shopping the aisles of Home Depot. Ridgid, in particular, has a long and deep association with its plumbing tools.

Finally, we see the potential for a long-term catalyst in the stock with a breakup of the portfolio between Emerson's automation and commercial and residential platforms. In our minds, this would be a 2021-and-beyond event and wouldn't take place before the retirement of current CEO David Farr.