Updated on March 26th, 2021 by Bob Ciura
The Dividend Aristocrats are some of the best dividend stocks an investor will find. These are companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We believe the Dividend Aristocrats are among the highest-quality dividend growth stocks around. For this reason, we created a downloadable spreadsheet of all 65 Dividend Aristocrats, along with important metrics such as price-to-earnings ratios and dividend yields.
You can download the Excel sheet of all 65 Dividend Aristocrats by clicking the link below:
Each year, we review all of the 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 31 Dividend Kings.
Dover has now increased its dividend for an amazing 65 consecutive years. The company’s dividend is also very safe
At the same time, Dover stock has experienced a multi-year rally. As an industrial stock, it has benefited from the steady economic growth since the Great Recession ended. The end result is that the stock appears to be overvalued, which is why right now might not be the best time to buy Dover stock.
Dover Corporation is a diversified global industrial manufacturer with annual revenues of ~$7 billion and a market capitalization of $15 billion. Dover is composed of five reporting segments: Engineered Systems, Fueling Solutions, Pumps & Process Solutions, Imaging & Identification and Refrigeration,& Food Equipment.
Slightly more than half of revenues come from the U.S., with the remainder coming from international markets. Dover spun off its energy business, Apergy, at the beginning of May 2018.
Dover continued to perform well over the past year, despite the coronavirus pandemic’s negative impact on the global economy.
Source: Investor Presentation
Dover reported fourth-quarter and full-year earnings results on 1/28/2021. Revenue of $1.8 billion was flat compared to the prior-year quarter. Adjusted earnings–per–share of $1.55 was 0.6% higher than the prior year.
For the year, revenue declined 6% to $6.68 billion. Adjusted earnings–per–share decreased 4% to $5.67 in 2020, though this was $0.24 ahead of our estimates. Organic sales fell 2% for the quarter and 7% for the year, primarily due to the impact of COVID–19.
By segment, Engineered Products declined 9% year–over–year as strength in aerospace and defense was offset by weaker demand for industrial winches and waste handling. Fueling Solutions fell 9% and Imaging & Identification sales fell 3%. Offsetting these declines were growth in other segments. Pumps & Process Solutions returned to growth as sales were higher by 2%, and Refrigeration & Food Equipment sales rose 13%.
Overall, Dover performed well in 2020 considering the economic damage done by the coronavirus pandemic. Bookings grew 5% in the fourth quarter, which bodes well for 2021. Assuming the global economy continues to recover, the company should have another year of growth in 2021. Dover expects adjusted earnings–per–share of $6.25 to $6.45 for 2021.
Dover’s future growth will come from continued expansion of the global economy. As a diversified industrial manufacturer, Dover will naturally benefit from GDP growth. Besides organic growth in existing businesses, Dover’s earnings growth will also come from margin improvements thanks to its recent portfolio actions.
First, Dover launched an aggressive cost-cutting program to boost margins across its operating segments. The ambitious cost-reduction effort will also free up additional resources for investment in growth. Dover is active on the mergers and acquisitions front. Since 2014, Dover has spent billions on a number of bolt-on acquisitions.
Dover’s future growth prospects are accelerated by its portfolio reshuffling. The company launched a re-segmentation of its businesses. The goal of this re-segmentation is to increase efficiency and transparency across the organization.
Lastly, emerging markets are a long-term growth catalyst for Dover. Overall, we expect approximately 8% annual earnings-per-share growth for Dover through 2026.
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 is in good financial condition. It has a long-term credit rating of BBB+ from Standard & Poor’s and Baa1 from Moody’s. High credit ratings 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.
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:
- 2007 earnings-per-share of $3.22
- 2008 earnings-per-share of $3.67 (14% increase)
- 2009 earnings-per-share of $2.00 (45% decline)
- 2010 earnings-per-share of $3.48 (74% increase)
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. And its dividends continued to grow during this period of uncertainty.
Dividends continued to increase in 2020, proving once again the recession-resistant nature of Dover’s business model.
Valuation & Expected Returns
Based on expected EPS of $6.35 for 2021, Dover stock trades for a price-to-earnings ratio of 21.9, using the company’s earnings guidance. Dover held an average price-to-earnings ratio of 16.2 over the past 10 years. Dover stock appears to be overvalued, based on its average valuation multiples.
If Dover stock experiences a decline in the valuation multiple to the 10-year average P/E, it would reduce annual shareholder returns by 5.9% annually over the next five years.
Earnings growth and dividends will positively impact future returns. First, we expect the company to grow earnings-per-share by 8% per year through 2026.
Lastly, Dover stock has a dividend yield of 1.4%. Putting it all together, a breakdown of our expected future returns is as follows:
- 8.0% expected earnings-per-share growth
- 1.4% dividend yield
- -5.9% negative return from valuation contraction
In this projection, total shareholder returns could reach 3.5% annualized through 2026. This is a positive–albeit unspectacular–expected rate of return for this Dividend King.
Dover has endured a number of challenges over the past decade, including the Great Recession of 2008-2009, the oil and gas downturn in the past few years, and the coronavirus pandemic of 2020. 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.
Dover has a leadership position in its industry, and durable competitive advantages. These factors have the company positioned for growth in future years, making it highly likely that Dover will continue to increase its dividend.
Dover is a high-quality business and a dividend growth company, but the stock is simply too overvalued to earn a buy rating from Sure Dividend at this time. That said, on a pullback, we would be buyers of this quality industrial stock.