Dover Corp (DOV) Could Become One of Buffett’s Favorites (Part 8)

John Kozey, senior analyst at Thomson Reuters, listed 28 businesses that could become the favorites of legendary investor Warren Buffett. In previous articles, I covered a number of stocks from that list, including Mosaic Co (NYSE:MOS), CSX Corporation (NYSE:CSX), Johnson Controls, Inc. (NYSE:JCI), Archer Daniels Midland Company (NYSE:ADM) and Coca-Cola Enterprises Inc (NYSE:CCE).

In this article, I would like to talk about one more industrial stock in that list, Dover Corp (NYSE:DOV). Since the market hit bottom in March 2009, Dover has advanced significantly, from around $25 per share to nearly $74 per share. Let’s dig deeper to seewhether or not investors should own Dover at its current price.

Business overview

Dover, incorporated in 1947, is considered a global diversified manufacturer of innovative equipment, specialty systems, and support services, operating in four main business segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The majority of its revenue, $3.42 billion or 42.2% of 2012’s total revenue, was generated from the Engineered Systems segment.

The Energy segment ranked second, with $2.17 billion in revenue in 2012, while the Communication Technologies and the Printing & Identification segment contributed nearly $1.52 billion and $996.5 million in revenue, respectively. Among the four segments, the Energy segment enjoyed the highest operating margin at 24.8%. The Engineered Systems operating margin ranked second, with a 14.7% operating margin.

Consistent growing operating performance

Since 2009, Dover Corp (NYSE:DOV) has experienced a consistent increase in its top line, bottom line, and cash flow. Its revenue increased from $5.78 billion in 2009 to $8.1 billion in 2012, while net income rose from $356 million to $811 million during the same period. Its operating cash flow and free cash flow have also been on the rise. Operating cash flow climbed from $796 million in 2009 to $1.27 billion in 2012, while free cash flow advanced from $676 million to $976 million during the same period.

Moreover, Dover Corp (NYSE:DOV) is a dividend paying company which has consistently increased its dividend. In the past ten years, its dividend has experienced an 8.84% annualized growth to $1.33 per share in 2012. Interestingly, at the current dividend payment, its payout ratio seems to be conservative at only 29.4%.