3M or Emerson Electric: Which Industrials Dividend King Takes the Throne?

The industrial sector is often viewed as an economic bellwether. Industrial manufacturers supply products to a diverse set of customers that encompass virtually every market sector. As a result, industrial stocks are widely seen as a gauge of the global economy. Industrial manufacturers operate highly cyclical businesses. Despite the cyclicality associated with industrial stocks, many have long histories of steady dividend increases each year. For example, 3M Co. and Emerson Electric Co. are both members of dividend royalty. They have each raised their dividends for over 50 years in a row, qualifying them for the exclusive list of Dividend Kings. 3M and Emerson Electric both have high-quality business models and similar dividend yields. Both are also good bets to continue increasing their dividends each year. But what if investors had to pick only one? Now that would be a tough choice. Let's look at how the two companies stack up against each other. Business Overview and Recent Events The two companies have very different end users for their manufactured products. Let's take a look at 3M. The company is nearly three times the size of Emerson Electric in terms of market capitalization. 3M sells more than 60,000 products that are used every day in homes, hospitals, office buildings and schools around the world. 3M is composed of four separate divisions. 3M's industrial division produces personal protective gear and security products, as well as tapes, abrasives, adhesives and supply chain management software and solutions, among other products. The company's healthcare unit supplies medical and surgical products, as well as drug delivery systems to customers. The electronic and energy division produces fibers and circuits, with a goal of using renewable energy sources while reducing costs. And 3M's consumer division sells office supplies, home improvement products, protective materials and stationary supplies. By contrast, Emerson Electric is smaller than 3M, and focuses on two core categories: automation and commercial and residential products. The automation solution business provides automation expertise in projects and operations. This unit services a wide variety of industry groups, including: food and beverage, automotive, mining and metals, oil and gas and packaging, among other categories. Meanwhile, Emerson's commercial and residential solutions' business manufactures products that help businesses become more efficient. Products include heating and air, thermostats, refrigeration, food waste disposals and many more. Both companies have posted strong financial results in recent quarters. 3M released financial results for the fourth quarter and full year 2018 on January 29. 3M's adjusted EPS increased 10% in the fourth quarter, due in part to a solid 3% organic revenue growth rate. For the year, adjusted EPS increased 14% to $10.46. Organic revenue growth increased 3.2%, while share repurchases fueled additional EPS growth. 3M returned $4.9 billion to shareholders in 2018 in the form of buybacks. Emerson also reported strong results for its most recent quarter. Total sales were up 9% during the quarter as organic revenue increased 4.5%. Growth was mixed for Emerson last quarter. The automation solutions segment posted organic sales growth of 7%, on strong maintenance and repair (MRO) demand, compared with a 1% decline for the commercial and residential solutions business. Emerson repurchased $800 million worth of stock last quarter, which, combined with revenue growth, fueled over 20% EPS growth for the quarter. Growth Outlooks 3M and Emerson Electric may have similar businesses, but their future growth outlooks are quite different. 3M expects organic sales in local currency to rise by 1%-4%. The company also expects EPS in fiscal 2019 to range from $10.45 to $10.90, down from previous guidance of $10.60-$11.05. At the midpoint of guidance, 3M expects adjusted EPS growth of just 2% for 2019. Share repurchases will likely account for the bulk of full-year EPS growth, as 3M expects to repurchase between $2 billion to $4 billion worth of stock in 2019. Still, 3M is likely to offer only modest EPS growth this year. Meanwhile, Emerson Electric has been engaged in a significant turnaround over the past three years, characterized by sales of under-performing business segments. In 2016 Emerson sold its network power and other power businesses for over $5 billion, using the money to reinvest in more attractive areas of growth. To that end, Emerson spent over $2 billion on acquisitions in 2018, including the A.E. Valves acquisition and the acquisition of GE's Intelligent Platforms business. These moves have paid off for Emerson, as the company expects 2019 to be a very strong year. Net sales are expected to increase 7%-10% for the year, with acquisitions contributing 5% of full-year sales growth. Organic sales, excluding the impact of foreign exchange, are expected to rise 4%-7% this year. EPS growth is expected in a range of 4%-8% for fiscal 2019. One Dividend King Takes the Throne There are quite a few industrial stocks with long histories of steady, annual dividend increases. 3M and Emerson Electric are among the highest-quality Dividend Kings. But if investors could only choose one, Emerson appears to be the better pick of the two. Not only does Emerson have a slightly higher dividend yield than 3M right now, 2.7% to 2.6%, but Emerson is also slightly cheaper on a valuation basis. 3M shares trade for 20.5x 2019 EPS forecasts, while Emerson stock is valued at 19.8x this year's EPS. And, considering Emerson's stronger fundamentals in recent quarters and its more optimistic forecast for 2019, it is likely to generate higher EPS growth than 3M over the near-term. As a result, while both stocks are high-quality dividend stocks to buy and hold for the long-term, Emerson is the true industrial Dividend King.

3M or Emerson Electric: Which Industrials Dividend King Takes the Throne?

3M and Emerson Electric may have similar businesses, but their future growth outlooks are quite different.

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