Dividend King – Dover Corporation

A key tenet of Dover Corporation’s business strategy is to divest existing businesses while acquiring new ones to improve margins, enhance profitability, and increase returns to shareholders. But sometimes things don’t go quite as planned.

In its latest quarterly release, Dover Corporation announced that is gross profit was up 2.4% year-on-year. However, its gross profit margin decreased from 37% to 35.8%, reflecting a 9.5% increase in cost of sales.

Could this be an unwelcome turning point for shareholders in Dover, or an opportunity for dividend investors to add the stock to their portfolio?

Business Overview

A global manufacturer of consumer supplies, aftermarkets parts, software and digital solutions, equipment, and components, as well as support services, Dover Corporation operates many brand names across five segmented operations:

Engineered Products – serving the vehicle aftermarket, waste handling, aerospace, industry, and defense markets through brands that include Environmental Solutions Group, TWG, and Vehicle Service Group (VSG).

Clean Energy and Fueling – delivering safety and efficiency solutions for the convenience retail, fueling and clean energy, cryogenic gas, and vehicle wash markets.

Imaging and Identification – focused on the design and manufacture of equipment, software, and consumables, as well as support services for marketing and coding, product traceability, authentication, and digital textile printing markets.

Pumps and Process Solutions – under brand names such as Dover Precision Components and MAAG Group, this segment supplies critical components and solutions to enable safe handling of liquids across the chemical, bioproduction, hygienic, energy, and diversified industrial markets.

Climate and Sustainable Technologies – serving multiple industries under trade names that include Belvac, SWEP, and Dover Food Retail, Dover Corporation develops and supplies innovative, energy efficient equipment and systems for commercial refrigeration, heating & cooling, and beverage packaging equipment markets.

Business Performance

Dover Corporation recently announced its third quarter 2022 results. Surprising on the upside, shares have moved ahead of broader market gains in the few weeks since the announcement.

In the 10 years between 2012 and 2021, revenues have increased from $6.63 billion to $7.91 billion: an increase of 19.3%. A closer look however, revenues have been erratic.

The same can be said for its earnings. It would seemed that the business has stayed about the same for the last 10 years.

EPS may have increased by 63% between 2011 and 2021, but it isn’t always a smooth ride. Dover’s earnings per share have grown over the last 4-years thanks to its share repurchase program.

Growth Prospects

Throughout its history, Dover’s management has worked hard to evolve its business. It has spin off businesses and added new companies to its portfolio. It delivers a healthy combination of reinvestment into its business and sharing its profits with shareholders by way of dividends and share repurchases.

Dover Corporation has benefited from the exit from Covid. It has made opportune acquisitions, a good order book, with a sizeable backlog to run for the next few years. Analysts expect EPS to rise to around $8.44 this year and $8.90 next year, on revenues that remain broadly unchanged.

Dividend Profile

Dover Corporation is a dividend aristocrat. It has increased its annual dividends for the last 66 years. Currently, the forward dividend of $2.02 per share delivers a yield of 1.55%, and is covered more than 4 x by EPS.

The company benefits from very good operating cash flow, increasing from $800 million in 2018 to $1.1 billion in 2021. This gives it the muscle to continue to pay dividends should a tough recessionary environment affect its business.

Business Risks

While Dover Corporation is a highly diversified business, the risks associated with its global portfolio must be acknowledged to make a fully informed investment decision. These risks include:

• Economic conditions: a deep and extended recession could put the skids under sales.
• Interest rates: the company has delivered EPS growth in part by strategic borrowing to fund its business strategy. Should interest rates rise further than expected, this could dent the bottom line.
• Exchange rate: international earnings will be impacted by the strength of the dollar.
• Inflation: expectations that current inflation will be transitory may be wrong. Higher inflation could dent margins in Dover’s core businesses.
• Regulations and tariffs: Dover’s international businesses are subject to both regulatory change and tariffs beyond its control.

Final Thoughts

Dover’s revenue and earnings have been erratic over the last 10 years. While earnings have surprised on the upside for four straight quarters, and its TTM revenue appears to now be firmly into $8bn+ territory, there remains a feeling of a question mark over this stock.

Since 2012, Dover Corporation has increased its debt from $4.57 billion to $6.66 billion. Its debt/equity ratio has near doubled, from 0.91 to around 1.7.

Simultaneously, it has also repurchased around 23% of its outstanding shares and reward their shareholders with increasing dividends over the last 66 years.

Analysts are becoming used to Dover surprising on the upside. A downside surprise could send the shares into underperformance, at least until the future becomes more certain. On the other hand, the company benefits from great cash flow and a healthy buffer to protect its dividends.

For existing shareholders, we doubt that Dover will reduce its dividend anytime soon. Then again, if you are considering adding Dover into your portfolio as a dividend stock, you may find a better buying opportunity in the future than it is today.