The Dilemma With Slow Growth | Denewiler Capital Management

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The Dilemma With Slow Growth

Written by Ethan Anderson // November 18, 2022

In Episode 17 of The Dividend Mailbox, “The Dilemma With Slow Growth”, we take an in-depth look at Emerson Electric (EMR). Emerson is a company that has been around for over 100 years, and it has grown its dividend for over 60 years, making it a Dividend King. In decades past, the dividend grew at an attractive rate but that has changed in the last 10 years, unfortunately after we first bought it in 2012.

Since we bought it, the company has proven to be a decent investment with a total return of 150%. However, most of that return comes from stock price appreciation and not the dividend growth we focus on. On average over the past 10 years, the dividend has only grown at 2.5% a year, and at 1% more recently.

As a benchmark threshold, we set a target growth rate of at least 6%, because that is the long-term average growth rate of the S&P 500’s dividend. We want to at least match that growth and ideally exceed it. Emerson has yet to deliver on that goal.

One simple model that we use to gain some clarity about a company’s dividend going forward, and whether an investment should be considered (or reconsidered), is our simple 10-year dividend growth model.


EMR Simple Dividend Growth Model


To summarize the model above:

First, we grow the current dividend of $2.08 by the assumed growth rate of 5% per year. In 2031, we expect a dividend of $3.23 with the given growth rate parameters.

Second, we calculate the implied stock price. We assume a terminal yield of 2.5% because it includes a margin of error from EMR’s current dividend yield of 2.2% and it is also a reasonable expectation given EMR’s recent dividend yield history. To calculate the simple implied stock price, we take the dividend of $3.23 in 2031 and divide it by our assumed terminal yield of 2.5%. This indicates an implied 10-year stock price of $129.07.

Finally, we calculate our total return. To do this, we add up all the dividends we have received over the 10-year horizon, which equals $26.16. Then, we calculate the capital gain on the stock price: $129.07 – $95 = $34.07 (we assume to theoretically have purchased the stock around its current trading price at $95). Next, we combine our total dividends and capital gain to equal $60.23, and then we divide that by our purchase price of $95. That gives us an implied total return of 63%.

At first glance, a total return of 63% in 10 years doesn’t meet our target threshold return of 100%. However, it is important to understand that we have baked in some margin of error into the model, including a dividend growth rate of 5% (below our target of 6%) and a terminal yield of 2.5% (above its current yield of 2.2%), plus this model doesn’t account for compounding.


If Emerson can get its dividend growth rate back on track to 6% a year, and the terminal yield remains at 2.2%, then we have a total return of 97%, very close to our target. Based on guidance from management, we already know that we will probably get another 1% dividend increase in 2023. However, Analyst expectations for 2024 are for EMR to earn $4.64 per share. If they maintain a payout ratio of 50% (their long-term average), that means the dividend will be $2.32 in 2024, which puts the company back on track for 6% dividend growth. From our perspective, Emerson has the capability to still deliver on our expectations, which is why we continue to hold it. It really is just going to come down to management’s execution of the transition that they are currently going through. We expand further on why we think Emerson can get back on track and what the company has going for it, in Episode 17: “The Dilemma With Slow Growth.

Regardless, this simple dividend growth model is useful in determining if a company will or won’t meet certain thresholds for dividend growth. It is a great starting place for doing research on a new company, and it helps with staying disciplined when monitoring companies as they evolve.


About The Author:

Ethan Anderson
Portfolio Manager & Head of Research at Denewiler Capital Management