Dover: This Dividend King Is Firing On All Cylinders

Valuation & Expected Returns

ValueLine analysts expect Dover to generate earnings-per-share of $5.00 in 2018, which means the stock trades for a price-to-earnings ratio of 19.7.

DOV Valuation

Source: ValueLine

While this valuation is cheaper than that of S&P, investors should keep in mind that a recession has not shown up for nine years in a row. Investors should keep this risk factor in mind, particularly amid rising interest rates. Moreover, according to ValueLine data, Dover has traded at an average P/E ratio of 16.2 during the last decade. Therefore, the stock is not particularly cheap at the moment.

The management of the company targets 3%-5% long-term revenue growth. In addition, the stock currently offers a 2% dividend yield and the company has repurchased its shares at a 1.5% average annual rate during the last decade. Therefore, if we assume no margin expansion for the sake of safety, the stock is likely to offer average annual returns of 7%-8% going forward, as long as a recession does not show up. On the other hand, in the event of a recession, the stock is likely to incur steep contraction of its P/E ratio, which will largely offset the above growth.

Dover has raised its dividend for 62 consecutive years. This is an exceptional achievement, particularly for a cyclical industrial stock. The vast majority of cyclicals see their earnings collapse during economic downturns and hence they cannot keep raising their dividends for decades. However, thanks to its above-analyzed business model, Dover has maintained its exceptional dividend growth streak quite easily. To be sure, its payout ratio currently stands at 35%. As this ratio is markedly low, it leaves ample room to the company to keep growing its dividend for many more years.

Final Thoughts

Dover is one of the very few cyclical companies that have managed to become dividend kings. In addition, now that the fierce downturn of the oil market has come to an end, Dover is firing on all cylinders, with meaningful growth in all the segments. Therefore, given its exciting growth prospects and its strong financial position, the stock is likely to continue to offer great returns in the absence of a recession. Nevertheless, as the U.S. economy has run for nine consecutive years without a recession, investors should be aware of the downside risk in such an event.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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