Searching for dependable investments that can weather the ups and downs of the stock market poses a challenge for many investors. Dividend Aristocrats may offer a solution. These companies must not only pay dividends consistently, but also increase payouts annually for a minimum of 25 straight years. This remarkable track record demonstrates these businesses' resilience, adaptability and financial strength through varied economic cycles. Including these stocks in a portfolio provides investors with the dual benefits of steady dividend income and the potential for capital appreciation over time.
One of the most compelling dividend aristocrats is Dover Corp. (DOV, Financial), a global manufacturer of equipment and components. It operates in five main segments: Engineered Products, Clean Energy & Fueling, Imaging & Identification, Pumps & Process Solutions and Climate & Sustainability Technologies.
Strategic growth via mergers and acquisitions
One of the key components of the company's growth strategies is mergers and acquisitions. Dover's acquisition strategy is built on two main principles. The primary focus is on integrating businesses that resonate well with their existing operations. This can be through broadening market presence, diversifying product lines or amplifying technological advancements and customer value. On another front, when conditions are favorable, Dover is open to considering larger, independent entities that either align with their current framework or introduce them to adjacent growth opportunities. What characterizes the businesses Dover is interested in are their dominance in their respective markets, an innovative streak, alignment with its endeavors, a promising growth trajectory and resilient returns. Additionally, these ventures should promise substantial synergy, aiming for a double-digit return on investment within a span of three years post-acquisition.
In the period between 2020 and 2022, Dover allocated nearly $1.8 billion for mergers and acquisitions, after adjusting for cash received and potential considerations, to onboard 18 companies. The company's future trajectory hinges largely on pinpointing and incorporating successful companies that broaden its service and product spectrum and further solidifies its rapport with clients. While it anticipates an annual organic growth rate that exceeds the gross domestic product by 3% to 5% over extended periods, the consistent growth of Dover's portfolio is also underpinned by its skill in seamlessly integrating these acquired enterprises, provided there are no unexpected economic challenges. To ensure post-merger integrations are on track and synergies are captured, Dover has in place a meticulous internal monitoring system and tried-and-tested protocols.
Enhancements in operating efficiencies drive return and profitability
Dover predominantly caters to industrial manufacturers. This customer base inherently ties its revenue to the ebbs and flows of broader economic conditions, making it particularly susceptible to global recessions. However, the company's track record showcases remarkable resilience amidst these downturns. Over the past 20 years, while global economic fluctuations have influenced its operating performance, a discernible positive uptrend remains evident.
Between 2002 and 2022, Dover's revenue expanded from $4 billion to $8.5 billion—a bit more than a twofold increase. However, a deeper dive into its financials reveals a more compelling story. The company's operating income surged from $363.45 million to $1.41 billion, signifying a 7% compounded annual growth rate, while its Ebitda increased from $520.4 million to over $1.7 billion, a 6% CAGR. Although the revenue growth was substantial, the more pronounced growth in operating income and Ebitda highlights the company's enhanced operational efficiency. This distinction suggests that Dover has not only focused on top-line growth, but has also strategically bolstered its bottom line, underscoring a commitment to improving profitability and operational excellence.
Building on this momentum, Dover's bottom-line margin and return on capital have witnessed substantial enhancements within this period. The operating margin leaped by 86%, settling at 16.65%, while the Ebitda margin experienced a nearly 58% rise, reaching 20.27%. This financial evolution paved the way for the return on capital, which soared by over 63%, reaching 16.56% over the two-decade period.
Financial stability - Profitability cushion over debt obligations
At first glance, Dover's balance sheet might raise eyebrows among investors due to its debt figures. As of June, the company had nearly $3 billion in long-term debt and $446 million in short-term obligations. With cash reserves amounting to a mere $285.8 million, the resulting net debt stood at $3.14 billion. Yet, to genuinely gauge the gravity of this debt, it is important for investors to pivot their attention to the company's cash flow generation in relation to its debt standing. Historically, even as Dover nudged its debt-to-capital ratio to just about 50%, it has always maintained a high Ebit in relation to interest expense. By June 2023, the company's Ebit had exceeded its interest expenses by over 10-fold, showcasing a comforting cushion to address its debt-related obligations.
Dover's legacy: 68 years of consistent dividend growth
One of Dover's primary appeals to long-term and dividend investors is its unwavering commitment to consistent dividend payments. For an impressive 68 years, Dover has been elevating its dividends, representing one of the longest-standing dividend growth trajectories in the stock market. From 2002 to 2022, Dover's dividend per share demonstrated a significant climb, rising from 54 cents to $2.01. This represents a compounded annual growth rate of 6.8%. As of August, Dover had upped its quarterly dividend to 51. This move results in a 1.5% dividend yield based on its prevailing stock price of $134.7 per share.
While Dover boasts a commendable 68-year track record of escalating dividend payouts to its shareholders, this commitment does not come at the expense of financial prudence. Dover judiciously balances its dividend strategy, ensuring a sustainable payout ratio that aligns with both corporate growth and M&A activities. Tracing back to 2003, the company's payout ratio has oscillated between 23% and 53%. Notably, as of 2022's conclusion, this figure stood at a modest 27%.
Dover should be worth around $179 per share
Based on projections that Dover will maintain this 6.8% yearly dividend growth and considering an 8% required rate of return, the Gordon Growth Model can be used to determine the stock's intrinsic value. Here's the breakdown:
P = Expected Dividend for 2023 / (Required Rate of Return - Dividend Growth Rate)
= 2.01 * 1.068 / (0.08 - 0.068)
= $178.9.
Given this calculation, Dover's estimated intrinsic value stands at $178.9. When contrasted with its current share price of $134.7, it appears that the stock is undervalued by approximately 32.8%.
Key takeaway
Dover emerges as an investment gem in today's volatile market. With over six decades of consistent dividend growth, a dynamic approach to mergers and acquisitions and a commendable financial performance marked by increased operational efficiency, the company promises both stability and growth. Its diverse business segments highlight adaptability, while its acquisition strategy underlines forward thinking. Further, an intrinsic valuation indicates a potential undervaluation of approximately 32.8%. Collectively, these factors make Dover a compelling choice for investors seeking a harmonious blend of dividend income and capital appreciation.
