Dover: This Dividend King Is Firing On All Cylinders

During the last four years, Dover has spent $3.0 B on a long series of relatively small bolt-on acquisitions. Thanks to these acquisitions, the company has built up a diversified portfolio of products that are intended for highly profitable market niches.

More importantly, the company does its best to offer comprehensive solutions to its customers. Thanks to the efficiency and the economies of scale of such solutions, many customers engage with a long-term relationship with Dover. In this way, Dover enhances, not only its current sales, but also its potential for future growth opportunities.

While this business approach creates significant competitive advantages and markedly improves the performance of the company during recessions, it cannot do miracles in such periods. In other words, investors should keep in mind that the EPS of Dover significantly fall during recessions, as industrial manufacturers are significantly affected by the underlying economic conditions. This was evident in the Great Recession:

  • 2007 earnings-per-share of $3.22
  • 2008 earnings-per-share of $3.67 (14% increase)
  • 2009 earnings-per-share of $2.00 (45% decline)
  • 2010 earnings-per-share of $3.48 (74% increase)

Still, Dover grew earnings from 2007 to 2010. Moreover, Dover manages to spend low amounts on capital expenses compared to its operating cash flows. As a result, it has enjoyed strong free cash flows every single year in the last decade. Even in the Great Recession, it enjoyed free cash flows of $676 M or $3.62 per share. Moreover, its net debt (as per Buffett, net debt = total liabilities – cash – receivables) is $4.1 B, which is only 5 times its annual earnings.

The strong free cash flows and the healthy balance sheet are testaments to the strength of the business model and confirm that the company can easily continue to raise its dividend at a meaningful pace for years. During the last five years, the company has grown its dividend at an average annual rate of 6.0%.

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