Monday, November 3, 2008

* Stock Analysis: Dover Corp (DOV)

This article originally appeared on The DIV-Net October 31, 2008.

Linked here is a PDF copy of my detailed analysis of Dover Corp (DOV). Below are some highlights from the above linked analysis:

Company Description: Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment..

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
DOV is trading at a discount to 1.) and 3.) above. Since DOV's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, DOV is trading at a 25.6% discount. DOV earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
DOV earned two Stars in this section for 3.) and 4.) above. DOV has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 53 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
DOV earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,650 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as DOV has. If DOV grows its dividend at 7.6% per year, it will take 5 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: DOV is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. I would place DOV in the more risky category since it operates different businesses as stand-alone entities and its exposure to cyclical end markets. DOV continues to improve its ability to generate strong free cash flow as a result of discontinuing 20 low-margin, capital-intensive businesses over the past two years, and replacing them with 17 new high-margin/steady-growth operations. Risks include weaker industrial, energy and electronics markets; along with value-diminishing acquisitions.

Conclusion: DOV earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks DOV as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined a share price of $26.10 would result in a NPV MMA Diff. around the $3,000 level that I like to see. At that price DOV would yield 3.45%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 6.4%. This dividend growth rate is below the 7.6% used in this analysis, thus providing a small margin of safety.

As of the October 24, 2008 close, DOV was trading at $26.27, slightly above my $26.10 Buy Below price. If I were looking to initiate a position in DOV, I would do so on dips below $26.10.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in DOV (0.0% of my Income Portfolio) .

What are your thoughts on DOV?

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