Monday, July 13, 2009

Stock Analysis: Dover Corp. (DOV)

Linked here is a detailed quantitative analysis of Dover Corp. (DOV). Below are some highlights from the above linked analysis:

Company Description: Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
DOV is trading at a discount to 1.), 2.) and 3.) above. Since DOV's tangible book value is not meaningful, a Graham number can not be calculated. DOV is trading at a 14.9% discount to its calculated fair value of $37.06. DOV earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
DOV earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. DOV earned a Star as a result of its most recent Debt to Total Capital being less than 45%. DOV earned a Star for having an acceptable score in at least two of the four Key Metrics measured. DOV has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 54 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to > MMA
DOV earned a Star in this section for its NPV MMA Diff. of the $934. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as DOV has. If DOV grows its dividend at 8.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. DOV earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Other: DOV is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. DOV enhanced its ability to generate strong free cash flows by discontinuing 20 low-margin, capital-intensive businesses over the past couple of years, and replacing them with 17 new high-margin/steady-growth operations. The company still has ample growth and cost opportunities. Risks include weaker global, industrial, energy and electronics markets; along with value-diminishing acquisitions.

Conclusion: DOV earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks DOV as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $37.65 before DOV's NPV MMA Differential fell to the $500 that I like to see for a stock with 54 consecutive years of dividend increases. At that price the stock would yield 2.66%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.3%. This dividend growth rate is below the 8.0% used in this analysis, thus providing a margin of safety. DOV has a risk rating of 2.00 which classifies it as a medium risk stock.

DOV is a well-managed company with a strong balance sheet. Near-term the economic downturn will present challenges, but the company's management has done all the right things for long-term success. DOV should announce a dividend increase in August, I will likely wait until then before considering initiating a position. It is trading well below its buy price of $37.06. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in DOV (0.0% of my Income Portfolio).

What are your thoughts on DOV?

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1 comment:

  1. Thanks for the analysis. Dover is one of those companies that's at or near the lowest quintile P/E group. There aren't any signs of inventory or accounts-receivable jumps as of now, and its current ratio is an incredibly high 2.39. Even if 2009 earnings are going to be squeezed, as they were in 2001, I'd be surprised if free cash flow dipped significantly below the residuum needed to pay the dividend.

    Once caveat, though, Even though EPS plummeted from $2.55 in 2000 to to 80 cents in 2001, free cash flow from operations was up 24.4% in the same timeframe. Free cash flow was negative in 2000, if acquisitions are counted in capex, but were more than double the dividend requirement in 2001 on the same acqusitions-in-capex basis. Dover got the free cash flow up by dropping additions to PP&E and acquisitions by 12.3% and 38.1%, respectively.

    For 1Q '09, both earnings and operations cash flow decreased 63.0% and 29.3% (respectively) from 1Q '08. Free cash flow was well above the dividend requirement for that quarter - 165% of the dividend payout - but Dover has already decreased capex by 26% and has spent zero on acquisitions for 1Q '09: cutting the latter a full 100%. As noted just above, the free cash flow level still provides a lot of cover for its dividend. If both earnings and operations cash flow keep declining, though, the company may have to pull another rabbit out of its hat to keep it on the Dividend Aristocrat list.

    I think they might, if need be, in the area of short-term investments in the Investing section of the cash-flow statement. Also, I believe that any earnings and FCF difficulties Dover may have this year will be water under the bridge next year. It would be very unusual for Dover to chop or pass its dividend as a result of a single-year squeeze.

    I've gone through these points not to criticize the above analysis, but to suggest that Dover may go on sale later this year should earnings and FCF be further crimped. I'd be glad to see it come back to the "Low P/E Bin" I monitor.


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