Thursday, September 3, 2009

Dover Corporation – Stock Analysis Shows Industrial Strength

Dover Corporation (DOV) is a diversified manufacturer of a broad range of specialized industrial products and manufacturing equipment. The company has evolved largely through acquisitions, with 79 acquisitions costing approximately $4.1 billion completed between January 2000 and December 2008. It has four operating segments: Industrial Products (33% revenue 2008), Engineered Systems (26%), Fluid Management (24%), and Electronic Technologies (17%).

DOV's growth strategy is based on initiatives such as driving organic growth (new products, pricing initiatives, gaining market share, customer service), acquisition strategy (acquire and develop platform businesses, growth, innovation, higher-than-average profit margins), expanding globally, and improving operating efficiency.

DOV is a Dividend Aristocrat and member of Broad Dividend Achiever and has been raising dividends for last 55 years. The most recent dividend increase was in August 2009. My objective here is to analyze if DOV still continues to be a good dividend growth stock and how does it rate on my scale of risk-to-dividends.


Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend chart is shown in image below.

  • Revenue: In general, a growing trend since 2002. The average revenue growth for last 10 years has been approximately 6.8%. Year 2009 is likely to show the weakness and dip in revenue.
  • Cash Flows: Overall, an increasing trend of free cash flow and operating cash flow. It is good indicator that FCF is always greater than income.
  • EPS from continuing operation: In general, it had an increasing trend from 2001 to 2008. It is likely to take a dip in 2009.
  • Dividends per share: Slow but increasing trend.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.57. This is a low risk category as per my 3-point risk scale. The ability to keep its margins, consistency and sustainability of FCF, low payout factor, and low leverage makes it a low risk to dividends stocks.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

  • Dividend growth rate: The average dividend growth of 8.8% (stdev. 2%) is little less than average EPS growth rate of 10.3% (stdev. 36%). Dividends are more or less growing along with the earnings.
  • Duration of dividend growth: 54 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10%.
  • Payout factor: It has been less than 50% since 2002. There appears to be sufficient room to sustain and grow dividends.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.7%; and (b) MMA yield is 3.4%. Last 10 years average dividend growth rate has been 15%, however, my projected dividend growth rate is 6.8%. With my projected dividend growth of 6.8%, the dividend cash flow is 1.06 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $20.00 (i.e. yield 5.10%)

Fair Value Calculation
This section determines what price I should pay to buy a given stock
• Net present value (NPV) price based on 15 year DCF: $30.4
• Average high yield price calculated based on past 10 years: $35.5
• Pricing based on past 10 year relative price-to-earnings ratio. $45.1
• Pricing based on price-to-earnings ratio of 12: $38.8
• Graham number: $23.3

The range of fair value is calculated as $30.5 to $34.6.

Qualitative Analysis
Dover Corporation founded in 1947, based out of New York, and has been paying and growing dividends since last 55 years. What surprised me is Dover’s ability continuously grow and sustain itself with so many different acquisitions and divestitures. This demonstrates that it keeps adapting to changes in the market place.

  • It’s revenue is pretty diversified in different product sectors and global regions. 44% of its revenue comes from outside of North America. It’s four product lines have share of 33%, 26%, 24%, and 17% respectively.
  • It continues to have stable gross and operating margins, generates relatively consistent operating and free cash flows.
  • It is very flexible in its quest for new growth and sustainability. It uses all different methods of growth such as organic, acquisition, operational efficiency, and global market share gains.
  • It faces short term to intermediate term challenge of weaker global markets. It remains to be seen how badly the company is getting affecting in this recession.

Conclusion
I like DOV diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It has been raising dividends for last 55 years. The stock’s current risk-to-dividend rating is 1.57 (low risk). The current pricing of $37.73 is very close to my buy range. I would be willing to go long, as per my allocation levels, when it falls in my buy range.

Full Disclosure: No position at the time of writing.

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