Dividend Aristocrats

Dover Stock, a 63 Year Dividend Aristocrat

Dover Stock is a member of the elite S&P 500 Dividend Aristocrats index. These are 64 companies that have raised their dividends consecutively for at least 25 years, without missing even one.

Hence, they are regarded as some of the best cash flowing companies on Earth. To be included in the aristocrats index, stocks must have a minimum $3 billion market capitalization and be a member of the S&P 500 index.

Management last raised its quarterly dividend by 2% on August 1st, 2019. The raise was from 48 cents a share to 49 cents. Readers should be aware of dividend growth investing strategy available to them that allows compounding and accumulation of wealth over a period of 20 to 30 years.

In this article, we will go over Dover’s business operations, latest financial results, dividend growth history, valuation and long term stock performance against the broader market indexes.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Founded in 1947 and employing over 24,000 people, Dover is a diversified global manufacturer conducting operations in 3 business segments. They are:

  • Engineered Systems
  • Fluids and Refrigeration
  • Food Equipment

Examples of the company’s products include gas pump nozzles used to fill car tanks, garbage trucks with automated front loader technology used by cities and municipalities, thermal transfer coders used in retail supermarkets, conveyors and clamps used in food processing, packaging, paper handling, automotive and other industrial markets, etc.

Management has a mandate to acquire strong free cash flowing and profitable businesses that complement their existing products and create synergy. It expects long term organic growth between 3% to 5% annually, mainly through price increases, acquisitions and new product development.

Since 2008, management has embarked on a mission to transform the company’s portfolio and streamline business units from 35 in 2008 to just 18 for the end of 2019.

Attached screenshot displays the improved business mix with 80% of total revenues generated from quality legacy businesses and improvement in organic revenue growth from 2.5% to 3.6%.

Dover Business Transformation

Management has built a business in favorable industries experiencing growth due to safety and compliance and changing consumer trends. Dover’s business also has very low exposure to commodity boom and bust cycles.

Attached screenshot from the company’s Investor Presentation shows the company’s revenues by end markets served.

There are 11 end markets shown with the top 5 spots below:

  1. Retail Fueling at 18%
  2. Food Retail at 14%
  3. Industrial Applications at 13%
  4. Automotive and Repairs at 12%
  5. Consumer Goods, Hospitality and Restaurants at 12%

Dover Revenues by End Market

Revenue Analysis & Share Buybacks

For full year 2019, Dover generated $7.136 billion in revenues  and earned a net income of $677.92 million, implying a 9.5% net profit margin. Revenues grew 2% year over year from 2018’s $6.99 billion. Earnings per share in 2019 came in at $4.67 per share, a 23% growth over 2018’s earnings per share of $3.80.

Over the last decade, Dover has grown its revenues from $6.11 billion in 2010 to $7.136 billion in 2019. This represents a compounded annual growth rate (CAGR) of 1.6%.

Trading on the New York Stock Exchange, Dover is valued at $9.54 billion market capitalization and pays a 3% dividend yield. This yield is 50 basis points higher than the yield paid by the S&P 500 index, which stands at 2.5%.

We like this stock due to management’s commitment to share repurchases each year. Over the course of 2018, management bought back $1 billion in shares, which represents 10% of all common stock outstanding.

This has helped earnings per share growth immensely as less shares are available to trade. On top of this, the company purchased an additional $143 million worth of stock in 2019.

Growth Outlook

In its 4th Quarter, 2019 earnings, Dover reported revenues of $1.776 billion, a 1.8% drop from the same period last year at $1.809 billion. Diluted earnings per share however grew 7.5%, from $1.07 per share in 4th Quarter 2018 to $1.15 per share in 4th Quarter, 2019.

Attached is a screenshot showing full year 2019 results by business segment. DEP which stands for Engineered Products saw revenue growth of 5% thanks to strong demand for waste handling equipment, vehicle services and aerospace products.

DII stands for Imaging and Identification grew revenues by just 1% thanks to order cancellations in digital textile industries in Asia.

Richard J. Tobin, CEO quotes, “During the fourth quarter, our Fueling Solutions segment grew despite a challenging comparable quarter in 2018, driven by strong global demand, most notably in North America on a pickup in EMV compliance activity.

Solid growth in Engineered Products was driven by healthy activity in both the waste handling equipment and software business and aftermarket vehicle services.”

He adds, “The Imaging & Identification segment declined slightly in the quarter, a result of continued slower marking & coding activity in Asia, as well as slower activity in the digital textile printing business.

The Pumps & Process Solutions segment posted a revenue decline, primarily due to comparable calendarization in our plastics processing business as well as slower demand in our pumps and precision components businesses as a result of channel inventory drawdowns. The segment’s biopharma business continued its double-digit growth trajectory.”

Finally, Refrigeration & Food Equipment segment had a slower quarter due to continued softness in new food retail store builds negatively impacting our systems volumes, partially offset by continued strength in core food retail case products and return to growth in our beverage can making and heat exchangers businesses.”

For full year 2020, Dover expects 2% to 3% in organic revenue growth thanks to Engineered Products, Pumps, Process & Solutions divisions growing between 3% to 5%. Slower growth is expected for Fueling Solutions and Refrigeration and Food Equipment.

Dividend Growth History

Dover is a member of the S&P 500 Dividend Aristocrats Index. The company has not only paid dividends for 63 consecutive years, but also grown them every year.

Management has grown its dividends from just 3.85 cents per share in 1980 to $1.94 per share in 2019. This represents a stunning 10% compounded annual growth rate (CAGR) over a 40 year period.

Chart below shows the steady uptrend in Dover’s dividend growth history.

Attached chart shows year over year % growth in Dover’s dividend since 1980. During the great financial crisis of 2008, management lowered its growth rate to mid single digits while the 90’s decade saw dividend growth in mid to high double digits.

Since 2015, management has slowed its dividend growth due to maturing markets and low organic growth of just 2% to 3%.

Measuring the Dividend Payout Ratio

Lets examine the the dividend payout ratio for Dover Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

In its annual report, Dover discloses full year 2019 free cash flow of $758.5 million. The company paid out $282.2 million in cash dividends. Knowing this information, what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $282.2 million / $758.5 million

DPR = 37%

A dividend payout ratio of 37% is very strong and leaves room for future dividend increases, acquisitions that will grow earnings per share, hiring salesforce to expand operations as well as share repurchases.

Long Term Stock Performance

Dover Stock has grown from just $2 in January 1980 to as high as $120 in January 2020. However thanks to fears of an economic shutdown due to Corona Virus, the stock has dropped to $66 as of March 2020.

Taking this in to account, the stock has risen at a compounded annual growth rate (CAGR) of 9% over a 40 year period, which is a superb performance.

During the great financial crisis of 2008, the stock dropped in line with the performance of the S&P 500. From peak to trough, Dover Stock dropped about 55% while the S&P 500 dropped 56%.

Stock Valuation

Analysts expect Dover to generate $6.25 in earnings per share for 2020. Based on the current stock price of $66, the forward price to earnings ratio is 10.6, which is lower than the forward PE ratio of the S&P 500 which stands at 13.

We like Dover stock at these valuations, thanks to its strong 3% dividend yield, a low 37% dividend payout ratio and organic revenue growth of between 2% to 3% expected for 2020.

Could the stock go even lower thanks to the Corona Virus fears? Absolutely it could.

Executive Summary

Here is what we like and don’t like about Dover Stock.

Likes

  • 63 years history of growing dividends making this a dividend aristocrat stock.
  • Decent dividend yield of 3%, 50 basis points higher than the S&P 500.
  • Dividend payout ratio of just 37% which leaves room for future dividend growth, smart acquisitions and share repurchases.
  • Forward price to earnings ratio of just 10.6 times, which makes this an attractively priced stock.
  • Opportunistic share repurchases of $1 billion in 2018, $143 million in 2019 and similar expectations for 2020.

Dislikes

  • Revenue growth over the last decade of just 1.6% CAGR, which is keeping up with inflation.
  • Slowed dividend growth rate of 4.36% over the last 5 years.
Market Capitalization $9.54 Billion
Dividend Yield 3%
Forward PE Ratio 10.6 times 2020 earnings
Dividend Growth (5 Year Avg.) 4.36%
Dividend Payout Ratio 37%
EPS Growth (3 Year Avg.) 12.9%
2019 Revenues $7.136 Billion
Gross Margin 37%
Net Margin 9.5%

Dover Stock Ex-Dividend Dates

Declared Record Payable Amount Type
0.49 U.S. Currency
Total dividends in 2020: 0.49
0.49 U.S. Currency
0.49 U.S. Currency
0.48 U.S. Currency
0.48 U.S. Currency
Total dividends in 2019: 1.94
0.48 U.S. Currency
0.48 U.S. Currency
0.47 U.S. Currency
Spin-off (in shares of another issue)
0.50 Spin-off (in shares of another issue)
0.379374 U.S. Currency
Total dividends in 2018: 2.309374

Source of Data: Dover Investor Relations | Dividend History

Dover Stock Price

To view the most recent price of Dover Stock, visit the company’s Investor Relations website and click on “Stock Information.”

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