Business Restructuring
Emerson Electric’s bold plan is to focus on its two best business segments: Industrial Automation (automation solutions) and Commercial & Residential Solutions. The favorable economics of these two segments versus the rest of the company is shown in the image below:
Source: Emerson Electric Morgan Stanley Conference Presentation, slide 5
The divestiture of a large chunk of Emerson Electric’s business will free up cash flows from more productive segments. If the company sells off its power generation and motors/drives business units it will generate a cash windfall.
How will management allocate its new cash flows?
A hint was given in the company’s fourth quarter 2015 presentation (side 11). Management will focus on:
“(An) increased level of evaluation and acquisition of key strategic assets”
Emerson Electric Co. (NYSE:EMR) appears to have (as of yet undisclosed) plans to make significant acquisitions that will refocus the company. Presumably, these acquisitions will complement either the company’s Industrial Automation or Commercial & Residential Solutions segments.
Will Restructuring Benefit Shareholders?
The real question with all of Emerson Electric’s planned moves is, ‘will all of this benefit shareholders?’
I argue that it is likely these moves will likely be beneficial for shareholders.
The spin-off of the company’s Network Power business shows that management is not concerned in empire building; quite the opposite.
While the company does have an eye out for acquisitions, Emerson Electric has proven to be very shareholder friendly in its capital allocation. In addition to the company’s 59 year streak of dividend increases, Emerson Electric has also repurchased an average of 1.8% of shares outstanding a year over the last decade.
Based on Emerson Electric’s historical dividend and share repurchase policy, I expect the company to continue to allocate capital in a shareholder friendly manner. The pending spin-off and other potential divestitures will focus the company’s operations on its better opportunities, thereby creating more value for shareholders.
Total Return & Dividend Payback Period
Emerson Electric stock currently has a high 3.8% dividend yield.
The company has managed to compound earnings-per-share at 8.6% a year over the last decade.
The company is facing significant headwinds in the short-run, including:
-Stronger United States dollar
-Growth slow-down in emerging markets
-Low oil prices (which impact sales from customers)
These factors will result in slow growth (and potential declines) for Emerson Electric in the near-term.
The company’s long-term growth prospects remain bright. I expect earnings-per-share growth of at least 8.0% a year for the company. With a more streamlined operation, there’s no reason Emerson Electric should not growfaster over the next decade than it did over the previous decade.
I expect long-term earnings-per-share growth of 8% to 10% a year from Emerson Electric. This growth combined with the company’s current 3.8% dividend yield gives investors expected total returns of between 11.8% and 13.8% going forward.
