DOV’s business generates very consistent free cash flow and targets a 10% free cash flow margin as part of its strategy. Such predictable cash flows allow DOV to comfortably pay a growing dividend while continuing to be opportunistic with acquisitions and share repurchases.
Source: Simply Safe Dividends
Since DOV is cyclical, it’s especially important to be aware of its balance sheet. Cyclical companies with high debt loads could run into periods of unexpectedly weak demand. If their cash flow dries up and capital markets are inaccessible, they might have to make tough decisions – such as cutting the dividend to keep funding their operations or repay some of their debt as it matures.
DOV’s balance sheet looks pretty healthy. As seen below, its net debt / EBIT ratio is 1.6. This means that the company could retire all of its debt with cash on hand and 1.6 years of earnings before interest and taxes (EBIT) – pretty reasonable. DOV also has an “A” credit rating from S&P and Fitch.
Source: Simply Safe Dividends
While DOV’s business is sensitive to the economy, its dividend payment is very safe. The company has conservative payout ratios, generates excellent free cash flow, and maintains a healthy balance sheet.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
DOV’s dividend growth potential is somewhat above average with a dividend Growth Score of 62. DOV increased its dividend by 5% in 2015 for its 60th consecutive dividend raise. DOV has one of the three longest records of consecutive annual dividend increases of all listed companies, a remarkable accomplishment.
Not surprisingly, the company is a member of the S&P Dividend Aristocrats Index and the exclusive list of dividend kings, companies that have raised their dividend for at least 50 straight years.
Over the last five fiscal years, DOV has increased its dividend at a 9% annualized rate. While depressed energy markets could keep dividend growth in the mid-single digits over the next 1-2 years, we expect the company’s long-term dividend growth to be between 6-9%.
Valuation
DOV trades at about 13.5x its forward earnings guidance and has a dividend yield of 3.2%, which is significantly higher than its five year average dividend yield of 1.9% and a decent starting yield for investors living off dividends in retirement. The stock looks cheap because investors are very concerned with the company’s high exposure to energy markets, which could cause earnings to fall even further in 2016 and 2017.
With 34% of segment earnings exposed to energy, it’s hard to say what impact depressed U.S. energy markets could have on DOV’s long-term earnings growth rate. If oil never recovers back beyond $60 per barrel, some of DOV’s business might never come back.
However, DOV’s other markets are all growing at around the rate of global GDP, and the company has the financial capacity to take on acquisitions. We would be surprised if DOV doesn’t find a way to grow earnings by at least 5-8% over the long term. When combined with the stock’s current dividend yield, DOV appears to offer total return potential of 8-11% per year. If the stock’s multiple ever improves, that would offer further upside as well.
For dividend growth investors willing to wait out energy market weakness, DOV is certainly interesting from quality and value perspectives. However, be aware that current market conditions could persist for quite some time and potentially shave off a few percentage points from DOV’s long-term earnings growth rate.
Conclusion
Dover Corp (NYSE:DOV) is certainly a blue chip dividend stock. However, it is a cyclical business that will experience its fair share of ups and downs. Energy market headwinds seem likely to continue pressuring DOV’s earnings growth for at least the next year, but they also seem to be creating an opportunity for patient dividend growth investors. Either way, DOV’s dividend is extremely safe and still appears to offer above-average growth potential going forward.
Disclosure: None
