Dover Corporation Dividend – Slowing or Growing?

By Chad Henage - June 4, 2012 | Tickers: CBE, DOV, IR | 0 Comments

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Dover Corporation (NYSE: DOV) has been around since 1947, but unless you are a customer or investor you might not even know the name. The company operates in four segments: Communications, Energy, Engineered Systems, and Printing. With 8% earnings growth in the last few years, and analysts expecting earnings growth of near 10% in the future, the company isn't resting on its laurels. One of the more well known accomplishments that Dover can claim is, they have increased their dividend for at least the last 25 years. However, as the market has shown, even dividend champions can be knocked off their throne. 

Before we get to the dividend, let's look at Dover the company. In a rare twist, Dover competes against multiple companies that are all nearly the same size when it comes to market cap. Dover's primary competitors are companies like Cooper Industries (NYSE: CBE) and Ingersoll-Rand (NYSE: IR). Just as a point of comparison, let's compare these three companies on a few metrics to see how Dover stacks up.

As you can see, all three companies trade at about the same relative valuation compared to their earnings growth. Dover leads the way in two categories, yield and free cash flow per $1 of assets. With the company generating more free cash flow per $1 of assets, we know that Dover uses their assets more efficiently than the other two companies. Now the question is, can the company afford the dividend payment they are currently making?

To be blunt, Dover generates plenty of cash flow to cover their current dividend payment. Even with 25 plus years of dividend increases, as of last year the company only pays out about 27% of their free cash flow. This hasn't been a recent development either, as the company's free cash flow payout has been between 27% and 30% each of the last three years.

So knowing the dividend is well covered, what about dividend growth? Since the company normally increases their dividend in the later part of the year, Dover hasn't initiated a 2012 increase yet. However, you can see how the company has handled dividend increases in the last several years:

It's a little hard to discern from the chart, but the company's average dividend increases have sped up in the last four years in particular. From 2004 – 2007 the company increased their dividend by an average of just over 7%. In the 2008 – 2011 timeframe the company's average increase rose to over 12% on average.

So what should investors expect in the future? Analysts expect EPS growth over the next few years of nearly 10%. With Dover only paying out 27% of their free cash flow, investors should be able to expect at least 10-15% dividend growth. While the company's current dividend yield of just over 2% isn't huge, the potential for growth is certainly there. With the stock selling at just about 12 times forward earnings, Dover should be a good value for investors at these prices. While 10% earnings growth, and a 2% yield won't qualify the company for the highest growth or the best yield; Dover will likely be around a lot longer than some current high-flyers.

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