Dividend Kings In Focus: Dover Corporation - Sure Dividend

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Dividend Kings In Focus: Dover Corporation


Updated on November 8th, 2021 by Bob Ciura

The Dividend Kings consist of companies that have raised their dividends for at least 50 years in a row. Many of the companies have turned into huge multinational corporations over the decades, but not all of them.

You can see the full list of all 33 Dividend Kings here.

We created a full list of all Dividend Kings, along with important financial metrics like price-to-earnings ratios and dividend yields. You can download your copy of the Dividend Kings list by clicking on the link below:

 

Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.

Dover Corporation (DOV) has raised its dividend for 66 consecutive years, giving it one of the longest dividend growth streaks in the entire stock market.

The company has achieved such an exceptional dividend growth record thanks to its strong business model, its decent resilience to recessions, and its conservative payout ratio, which provides a wide margin of safety during recessions.

Due to its conservative dividend policy, the stock is offering just a 1.2% dividend yield, which is roughly in-line with the average yield of the S&P 500 Index.

On the other hand, there is a lot of room for continued dividend raises each year. Dover is a time-tested dividend growth company, although the stock seems overvalued right now.

Business Overview

Dover is a diversified global industrial manufacturer, which provides equipment and components, consumable supplies, aftermarket parts, software and digital solutions to its customers.

It has annual revenues of about $7.0 billion, with just over half of its revenues generated in the U.S., and operates in five segments: Engineered Systems, Fueling Solutions, Pumps & Process Solutions, Imaging & Identification and Refrigeration & Food Equipment.

Pumps & Process Solutions is the best-performing segment. It proved the most resilient segment amid the pandemic, primarily due to the critical nature of its products, which are essential to Dover’s customers.

Last year was a difficult one for Dover due to the coronavirus crisis. As its customers are industrial manufacturers, they were significantly hurt by the global recession caused by the pandemic.

That said, the company has responded with a return to growth in 2021. You can see a breakdown of each segment’s results in the most recent quarter below:

Source: Investor Presentation

Revenue increased 14.9% to $2.01 billion, which was $20 million more than expected. Adjusted earningspershare of $1.98 was a 24% improvement from the prior year and $0.13 ahead of estimates.

Organic revenue was again strong at 13% while bookings improved 27%. All business segments saw growth compared to the prior year.

Management also recently raised the quarterly dividend marginally (by 1%) in August 2021, to continue its long streak of annual raises.

While admittedly not a huge increase, Dover’s raise still demonstrated resilience and underlying confidence in the ongoing recovery from the pandemic.

Growth Prospects

Dover has pursued growth by expanding its customer base and through bolt-on acquisitions.

Dover has routinely executed a series of bolt-on acquisitions, along with an occasional divestment, to reshape its portfolio to maximize its long-term growth:

Source: Investor Presentation

Dover is also likely to enhance its earnings per share via opportunistic share repurchases.

Dover offered revised guidance for the year. Adjusted earnings per share are now expected in a range of $7.45 to $7.50 up from $7.30 to $7.40, and $6.75 to $6.85 previously.

Organic revenue growth is still projected to improve 15% to 17% up from 10% to 12% for 2021.

We maintain our expected earnings growth rate of 8% through 2026 as Dover experiences higher demand for products following a recovery from the pandemic.

Competitive Advantages & Recession Performance

Dover is a manufacturer of industrial equipment, and some investors may think that the company has no moat in its business due to little room for differentiation.

However, the company offers highly engineered products, which are critical to its customers. It is also uneconomical for its customers to switch to another supplier because the risk of lower performance is material.

Therefore, Dover essentially operates in niche markets, which offer a significant competitive advantage to the company. This competitive advantage helps explain Dover’s consistent long-term growth trajectory.

On the other hand, due to its reliance on industrial customers, Dover is vulnerable to recessions. In the Great Recession, its earnings per share were as follows:

Dover got through the Great Recession with just one year of decline in its earnings per share and the company almost fully recovered from the recession in 2010. That performance was certainly impressive.

Dover is also impacted by downturns in the oil industry during periods of weak oil prices. The collapse of the price of oil from $100 in mid-2014 to $26 in early 2016 is a notable example of such a downturn. Its earnings per share decreased 28% from $4.54 in 2014 to $3.25 in 2016.

However, in 2018, Dover spun off its energy division, Apergy, which now trades as ChampionX Corporation (CHX).

Given its sensitivity to the economic cycles, it is impressive that Dover has grown its dividend for 66 consecutive years.

The exceptional dividend record can be attributed to the aforementioned decent resilience of the company to recessions. Another reason is the conservative dividend policy of management, which targets a payout ratio around 30%. This policy provides a wide margin of safety during rough economic periods.

Moreover, management has become remarkably conservative in its dividend raises over the last five years. During this period, Dover has raised its dividend at a ~3% average annual rate.

Overall, Dover will certainly continue to raise its dividend for many more years thanks to its low payout ratio, its decent resilience to recessions, and its healthy balance sheet.

But its 1.2% dividend yield and its modest dividend growth rate render the stock unattractive for income-oriented investors.

Valuation & Expected Returns

Dover stock has recovered nearly all its pandemic-driven losses and as a result, is currently trading at 23.2 times its expected 2021 EPS of $7.48.

This earnings multiple is much higher than the average price-to-earnings ratio of roughly ~17 in the last decade. This is our estimate of fair value for Dover stock.

Reversion of its earnings multiple towards its historical average would negatively impact shareholder returns going forward.

If the valuation multiple declines from 23.2 to 17 over the next five years, shareholder returns would be reduced by 6.0% per year over this period.

Including 8% expected annual earnings-per-share growth, the 1.8% dividend yield, and a -6.0% annualized contraction of the price-to-earnings ratio, we expect Dover to offer a 3.8% average annual return over the next five years.

This is a fairly low expected rate of return that does not bring the stock a buy recommendation at this time.

Final Thoughts

Dover has an impressive dividend growth record, with 66 consecutive years of dividend raises. This is an impressive achievement, particularly given the dependence of the company on industrial customers, who struggle during recessions.

However, due to its conservative dividend policy, the stock is offering a low yield of 1.2% while its dividend growth has significantly slowed in recent years. As a result, the stock is not highly appealing for investors who are focused primarily on income.

On the bright side, Dover has consistently grown its earnings per share over the years, primarily thanks to a series of bolt-on acquisitions. The stock has generated strong total returns to shareholders due to the company’s revenue and earnings growth.

The company has ample room to keep growing via this strategy for many more years.

We believe the market has already priced in a strong recovery from the pandemic. As a result, investors should wait for a meaningful correction of the stock before buying.

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