Dividend Aristocrats In Focus Part 41: Dover - Sure Dividend Sure Dividend

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Dividend Aristocrats In Focus Part 41: Dover


Updated on February 12th, 2019 by Nate Parsh

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.

 

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 fewer than 25 Dividend Kings.

Dover has now increased its dividend for an amazing 63 consecutive years. According to Mergent’s Dividend Achievers, Dover has the third-longest dividend increase streak of all publicly-held companies. The company’s dividend is also very safe at current levels, which is explored in more detail in the following video:

This article will discuss whether now is the right time to buy Dover stock.

Business Overview

Dover is an industrial manufacturer, with annual revenue of more than $7 billion. Its products include equipment, components, specialty systems, and more. After spinning off its energy business in 2018, the company now has three operating segments: Fluids, Engineered Systems, and Refrigeration & Food Equipment.

DOV Overview

Source: Investor Presentation

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

The company’s 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.

The refrigeration segment supplies energy-efficient equipment to the food industry.

Dover’s divested its energy business into a stand alone company called Apergy (APY) in early May of 2018. Revenue for this sector declined tremendously as the price of oil declined in 2014. Customers cut spending in response to low oil prices. The energy segment contributed the least to annual revenue. Removing energy allows Dover to focus on its core businesses.

Growth Prospects

Dover saw a notable improvement across most of its operating segments in the fourth quarter of 2018. Revenue and earnings-per-share grew 3.4% and 27%, respectively, in the fourth quarter.

For the year, revenue decreased 6.6% to $7.3 billion. Revenue from continuing operations, however, increased 2.5%. Earnings-per-share for 2018 totaled $4.97, $0.14 above the company’s guidance and a 13.5% increase from the prior year.

And, bookings were up 8% last quarter to $1.9 billion. This bodes well for growth moving forward.

Dover’s Fluids segment grew 17.2% organically during the fourth quarter and is now the largest contributor to revenue. This segment was led by its pumps and process solution businesses, which saw robust demand for products.

The engineered systems segment grew sales 4.3% on an organic basis as printing and IT businesses were strong during the quarter.

Dover’s refrigeration and food equipment business was the lone division to see revenues decline during the quarter. Revenues were down 10% due to lower volumes in the company’s can making and retail refrigeration businesses.

Dover is truly a global business as only half of sales in the last quarter came from the U.S. Sales for this region improved 6%.

Besides organic growth in existing businesses, Dover’s earnings growth will also come from margin improvements and acquisitions, which are key parts of the company’s growth strategy.

First, Dover launched an aggressive cost-cutting program to boost margins across its operating segments.

DOV Margins

Source: Investor Presentation

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.

The latest acquisition was for Belanger Inc, a full-line car wash equipment manufacturer. Belanger has been in business for 50 years and generated $55 million in sales last year. This purchase cements Dover as one of the largest car wash systems and equipment manufactures in the world. The deal closed at the end of January.

For 2019, Dover expects earnings-per-share of $5.65 to $5.85. This would represent nearly 16% earnings growth from 2018.

Dover expects full-year revenue growth of 2% to 3%. This includes organic growth of 2% to 4%, with unfavorable currency translation estimated to be a 2% headwind.

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 BBB+ from Standard & Poor’s and A3 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:

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.

Valuation & Expected Returns

Dover stock trades for a price-to-earnings ratio of 15.1, using the company’s earnings guidance for 2019. Dover held an average price-to-earnings ratio of 16.7 over the past 10 years. Dover stock appears to be undervalued, based on its average valuation multiples.

If Dover stock experiences an expansion of the valuation multiple to our estimate of fair value, it would yield a 1.6% annual boost to shareholder returns over the next five years.

In addition, future returns will be aided by earnings growth and dividends. We expect the company to grow earnings-per-share by 5% per year through 2024. This is a reasonable forecast, as Dover forecasts 3%-5% annual revenue growth, along with additional earnings growth from share repurchases and margin improvements.

Lastly, Dover stock has a dividend yield of 2.2%. Putting it all together, a breakdown of our expected future returns is as follows:

In this projection, total shareholder returns could reach 8.8% annualized through 2024. This is a satisfactory–albeit unspectacular–expected rate of return for this Dividend King.

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.

Dover’s two largest segments showed solid growth during the last quarter. And, we feel that removing energy from its core business was a prudent move by the company. These factors have the company positioned for growth in future years, making it highly likely that Dover will continue to increase its dividend.

While shares trade at a valuation below their historical norm, we rate Dover as a hold for now due to decent, but not great, potential returns. On a pullback, we would be buyers of this quality industrial name.

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