Dover Corp (DOV) Dividend Analysis

Dover Corporation, together with its subsidiaries, manufactures industrial products and components, as well as provides related services and consumables in the United States and internationally. It operates in four segments: Industrial Products, Engineered Systems, Fluid Management, and Electronic Technologies.
Dover Corp is a dividend aristocrat as well as a component in S&P 500 index. It has been increasing its dividends for the past 52 consecutive years. Over the past 10 years the company has delivered an average total return of 3.95 % annually to its loyal shareholders.

At the same time the company has managed to deliver an impressive 9.30 % average annual increase in its EPS.

The ROE declined from a high of 45% in 1999 to a low of 9% in 2002, before rising to 17% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 7.9% annually, which is slightly below the growth in EPS. An 8% growth in dividends translates into the dividend payment doubling every 9 years. If we look at historical data, going as far back as 1984, DOV has indeed managed to double its dividend payments every eight years.

If we invested $100,000 in DOV on December 31, 1997 we would have bought 2768 shares (adjusted for a 2:1 split in December 1997). Your first quarterly check would have been $263 in February 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly payment would have risen to $637 by November 2007. For a period of 10 years, your quarterly dividend has increased by 110.50 %. If you reinvested it though, your quarterly dividend would have increased by 142.17%.

The dividend payout has remained below 30% for the majority of our study period with the exception of a brief spike during 2001-2003. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that DOV is attractively valued with its low price/earnings multiple of 15 and low DPR. The company however boasts a below average dividend yield. I would consider initiating a position below $40.

Disclosure: I do not own shares of DOV

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Leveraged Investments

I have always been intrigued by the power of leverage. Using leverage means borrowing money to invest in something for the purpose of magnifying your profit potential.
When you are right, leverage works in your favor. When you are wrong though, leverage could result in disastrous results and bankruptcy.
An interesting leveraged instrument is SSO, which generates double the daily return of the S&P 500 through investments in stock index futures. If the S&P 500 rises by 1 %, SSO will increase by about 2%. The changes are never EXACTLY twice the rate of change for S&P 500 due to tracking errors.
I gathered daily data for S&P 500 going back to 1950. I then calculated the returns for the 58 year period for twice the daily changes in the index. I didn’t account for taxes, commissions, dividends and interest for simplicity purposes. The results are truly astonishing.
Investors who could have stomached the extra volatility from the increased exposure to the S&P 500 could have enjoyed average annual returns of almost 14.33% annually. The worst drawdown in annual returns occurred from 1972-1974 -68.60%, and 69.50% during the 2000 - 2003 bear markets. In addition to that, investors who bought the back tested index at the end of 1999 are still underwater by 37%.Here are the results per decade:

Year $1 invested at the beginning of the decade grows to: at the end of the decade
1950's $ 11.32
1960's $ 2.13
1970's $ 1.14
1980's $ 7.77
1990's $ 14.14
2000's $ 0.78

For example if you invested $1 in the SSO at the end of 1980, your investment would have grown to $55 by the end of 2007. On the other hand, the same $1 investment in an S&P index fund would have grown to $22.50.
So how should investors incorporate leverage in their portfolios? I believe that a 5% to 10% of ones portfolio could be invested in a leveraged instrument like SSO as a long-term investment. Over time this investment should boost your profitability overall.

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Selected Dividend Increases in April

Several Dividend Aristocrats have increased their dividends in April. The companies are:

Based off historical information from this spreadsheet, I would expect that the following companies increase their dividend in May: CLX, LEG, LOW, PEP,STR, ROH. These dividend aristocrats have last increased their dividend payments in May 2007. Upon a closer examination of the dividend growth stock behavior of the 60 dividend aristocrats, it seems that every month there is at least one company that raises its dividend. It’s nice to get a pay raise every month. The only dividend growth stock that has consistently increased its dividend twice in one year since 2003 is STT- State Street.

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Current Aging of the Dividend Aristocrats

In my article Historical changes of the S&P Dividend Aristocrats I showed that as of 2004, the average stay of dividend aristocrats in the index is about 6.50 years. So how long have the current members of the Dividend Aristocrats Index been raising their dividends?
You can download the information in this google spreadsheet.

It seems that on average, the companies in the Dividend Aristocrats list have increased their dividends for 36 consecuitve years. Thus, it appears that companies stay about 11 years on average in the index. However, the latter number of years is higher than the amount, reported in my article from monday, due to survivorship bias.

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Historical changes of the S&P Dividend Aristocrats

Some of the best companies in the world are part of the Dividend Aristocrats list, published by S&P. Corporations that have consistently increased their dividends for at least a quarter of a century make the cut in this elite index.

Recently I stumbled upon this document (opens as a pdf file), which shows historical changes in the S&P Dividend Aristocrats list from 1989 to 2004.

I also stumbled upon this document (opens as a pdf file) from ProShares, which also outlines the historical components of the S&P Dividend Aristocrats Index between 1992 and 2015.

You can see that in 1989, the number of companies was only 26. Only 7 of the original dividend aristocrats still remain in the index. The companies are: Dover (DOV), Emerson Electric (EMR), Johnson & Johnson (JNJ), Coca-Cola (KO), Lowes (LOW), 3M (MMM) and Procter & Gamble (PG).

In 2004, the number of Dividend Aristocrats rose to 56. Currently there are 60 companies in the index. The percentage of companies that remain in the index after 10 years is about 30%. There have been about 116 companies that have gone through the index for the 15 year period form 1989 to 2004. So as a dividend investor, you should expect year over year changes in the index.
The average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition.

Judging by the low initial number of dividend aristocrats in 1989, I think that the companies with continuous uninterrupted payment increases for periods of over a quarter of a century are a recent phenomenon, born from the ashes of the 1973- 1974 bear market. I am not sure whether dividend aristocrats have existed before 1980’s. That does mean though that this form of investing is a fad. Even if you continuously updated your dividend aristocrats’ portfolio, you would have achieved superior returns over the broad market averages .

Since the aristocrats only stay in the index for 6.5 years, shouldn’t an investor, who seeks continuous dividend raises for a maximum amount of years, invest in the dividend achievers? I do not have any historical data on the annual changes in the components on this index. Based off my limited observations over the past couple of years though, it seems to me that only 20 to 30 % of the 300+ dividend achievers out there would one day become dividend aristocrats. It also seems to me that some companies join the achievers list for a couple of years and then leave it for a while due to a difficult financial situation, only to come back several years after that.

So how will the data, presented above affect my strategy? Basically I do expect that almost all of the stocks that I buy will someday cut their dividend or freeze it for a period of time. I plan on selling companies that cut or suspend their dividend. I would not plan on selling companies that simply do not raise their dividend for a period of time, assuming that the company met my entry criteria in the first place though.

I also plan on continuously scan the market for opportunities that fit my entry criteria and allocate no more than 1% of my portfolio in a single instrument.

Update: I wanted to add a great comment from reader Yielder, regarding the companies that dropped off the list of dividend aristocrats.

"After filtering out the stocks the companies that disappeared as a result of corporate reorganization, eg., mergers, I looked at the remainder for some common thread. I found that in all cases save one, a company dropped off the list as a result of doing a large acquisition often using heavy debt. The acquisition was either outside the company's area of expertise or the company had little or no experience with acquisitions.

Regardless of whether a company has a long history of dividend growth, a large acquisition financed by debt is cause for alarm bells to go off. Excessive debt can choke the company especially if the new asset requires "fixing", eg. Jean Coutu's Eckerdt purchase. Unless a company has a great deal of experience with acquisitions, a quick & successful integration can be a problem especially if the company being acquired involves new areas of expertise."

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