Dividend Aristocrats In Focus Part 31: Dover - Sure Dividend Sure Dividend

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Dividend Aristocrats In Focus Part 31: Dover

Updated by Bob Ciura on November 3rd, 2017

The Dividend Aristocrats are some of the best dividend stocks an investor will find.

The Dividend Aristocrats are companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. There are just 51 of them.

Each year, we review all 51 Dividend Aristocrats. The next stock in the series is industrial giant Dover Corp. (DOV).

Dover might not be a familiar stock for most investors, but it has certainly earned its place on the list.

Dover is not only a Dividend Aristocrat. It is also a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases.

There are just 23 Dividend Kings, including Dover. You can see all 22 Dividend Kings here.

Dover has increased its dividend for an amazing 62 consecutive years.

According to Mergent’s Dividend Achievers, Dover has the third-longest dividend increase streak of all publicly-held companies.

Business Overview

Dover is an industrial manufacturer, with annual revenue of $7 billion. Its products include equipment, components, specialty systems, and more. It has four operating segments:

Dover’s largest segment, engineered systems, designs and manufactures components. Its products are used across multiple end markets, including consumer goods, textile printing, automotive service, environmental solutions, and industrials.

DOV Engineered

Source: Investor Fact Sheet, page 3

Dover’s fluids segment helps customers improve transfer and dispensing of fluids. Manufactured products include specialized pumps and tubes.

The refrigeration segment supplies energy-efficient equipment to the food industry. The energy segment offers solutions and services to improve safety and efficiency of fuel production.

2016 was a difficult year for Dover. Organic revenue declined by 5% for the year, while earnings-per-share fell 13%. This was due mostly to the steep decline in oil and gas prices over the past few years.

Dover’s customers have cut capital spending on new equipment, which has negatively impacted the company’s energy segment.

DOV Energy

Source: Investor Fact Sheet, page 2

Energy segment revenue declined by 25% in 2016.

Fortunately, Dover has a diversified business model. Growth across its other segments has helped offset weakness in the energy business.

Plus, now that oil and gas prices have recovered off their 2016 lows, Dover’s energy segment has come back in a big way. This sets the stage for a return to growth in 2017 and beyond.

Growth Prospects

Dover has seen a notable improvement across its operating segments. Revenue and earnings-per-share grew 16% and 47%, respectively, through the first three quarters of 2017.

Last quarter was particularly strong. Revenue increased 17%, while adjusted earnings increased 40%.

DOV Third Quarter

Source: Third Quarter Earnings Presentation, page 3

And, bookings were up 14% last quarter, which bodes well for growth moving forward.

Not surprisingly, the energy segment has fueled Dover’s growth so far in 2017. Energy segment revenue increased 31% last quarter.

The recovery in oil and gas prices has resulted in renewed spending activity among Dover’s major customers. Increased rig counts and well completions have driven higher U.S. drilling and production.

DOV 2017 Energy

Source: Third Quarter Earnings Presentation, page 8

In addition to a recovery in the oil and gas markets, Dover’s growth will benefit from acquisitions, which are a key part of the company’s growth strategy.

From 2014-2016, Dover spent $2.9 billion on 17 bolt-on acquisitions. Acquisitions provided 7% revenue growth for the company in 2016.

For 2017, Dover expects earnings-per-share of $4.23 to $4.33. This would represent at least 30% earnings growth from 2016.

Dover expects full-year revenue growth of 14% to 15%. This includes organic growth of 6% to 7%, acquisition growth of 10%, and a negative 2% impact from divestments.

Competitive Advantages & Recession Performance

No company can increase its dividend for 60+ years in a row, without durable competitive advantages. In Dover’s case, its competitive advantages include a large intellectual property portfolio, economies of scale, and a strong balance sheet.

Dover helps maintain its intellectual property, by investing in R&D:

Dover is in good financial condition. It has a long-term credit rating of ‘A-‘ from Standard & Poor’s. This helps Dover keep its cost of capital low.

Dover is in a fortunate position, in that it generates high levels of cash flow. It can invest 60% of cash flow in acquisitions and capital expenditures, and also return cash to shareholders through dividends and buybacks.

DOV Capital

Source: 2017 Morgan Stanley Laguna Conference, page 9

Dover’s competitive advantages allow it to maintain consistent profitability each year, even during recessions. Dover’s earnings-per-share during the Great Recession are below:

As a major industrial manufacturer, Dover is a bellwether for the global economy. As should be expected, it is not a highly recession-resistant company.

The deep economic downturn caused Dover’s earnings to nose-dive in 2009. However, the company only had one year of declining earnings during the recession. It returned to growth in 2010 and beyond.

Valuation & Expected Returns

Dover stock currently trades for a price-to-earnings ratio of 22.

According to ValueLine data, Dover held an average price-to-earnings ratio of 15.7, in the past 10 years. This means the stock is trading approximately 40% above its average valuation of the past decade.

DOV Valuation

Source: Value Line

Dover stock appears to be overvalued, based on its average valuation multiples. As a result, future returns will be derived mostly from earnings growth and dividends.

Dover management expects earnings growth in the mid-single digits over the next several years, through a combination of organic revenue growth, growth from acquisitions, margin expansion, and share repurchases.

A breakdown of potential future returns is as follows:

In this projection, total shareholder returns could reach 7%-9% annualized, including dividends. This return could be negatively impacted, if Dover’s price-to-earnings multiple reverts to its 10-year average.

Final Thoughts

Dover has endured a number of challenges over the past decade, including the Great Recession, and the oil and gas downturn of 2014-2016. And yet, it continued to raise its dividend each year, no matter what.

Very few companies have this ability, which makes Dover a rare dividend growth stock. Shares aren’t cheap right now, which means investors might want to wait for a better price before starting a position.

However, there are not many stocks with better dividend growth prospects than Dover. It remains a high-quality holding for dividend growth investors.

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