Friday, May 21, 2010

The Best Value Play You’ve Never Heard Of:

5/21/2010 – Dover Corporation (DOV)

Price - $44.45

52 Week - $30.26 - $55.50

Trailing EPS – 3.151

Dividend - $1.04

P/E – 19.24

Beta – 1.23

Fear cavalier. Renegade steer clear!

A tournament, a tournament, a tournament of lies.

Offer me solutions, offer me alternatives and I decline.

It's the end of the world as we know it.

It's the end of the world as we know it.

It's the end of the world as we know it and I feel fine.

R.E.M. front-man Michael Stipe could not have said it better. We are in tumultuous times and many investors have fled the market. From historic oil spills, European sovereign debt defaults, Icelandic volcanic activity, Chinese cleaver attacks, ‘fat-fingers’, and German naked shorts, the world is spiraling out of control and taking the market with it. Major fluctuations have become the norm: down 350 one day, up 100 the next. The Dow saw record setting intraday loses on May 6th, bounced up showing signs of life the next week, and has since confirmed that this life is teetering.

So what does the everyday investor do in this case? Cash out? Well prices are too low to do this right now and this is exemplified by the individual middle aged man who tried to get out on the 6th and in the process lost around $15,000 on Proctor & Gamble because of the incredible timing of his transaction. To this he blames his broker, but in truth it was an anomaly that no one could have predicted. But I digress. It is not the time to leave the market. In fact, most fundamentalists would say it’s the perfect time to get in. But in the process one must avoid risk and capitalize on available guaranteed profits. This is a time when value dividend investing is more useful than ever before.

With this in mind we will dive into one of the safest dividend plays you’ve never heard of: Dover Corp (DOV). It gets mentioned in passing in several articles but never truly examined. It’s safe but sometimes too safe, and certainly not sexy. But right now Dover is priced at $44, $11 below its 52 week high just a month ago on the day they reported an amazing first quarter earnings of 65 cents/share beating estimates by 14 cents. Like any company 2009 was not kind to Dover, but never did they cut dividends (more on this later). EPS for 2008 was at $3.67 and was followed by a $1.99 performance in 2009. But now analysts have an estimated EPS of $2.90 for 2010 and up to $3.71 in 2011. Keeping this in mind, dividends are expected to be raised to 27 cents a share quarterly in 2010 and possibly reach 29 in 2011. That gives a current yield of a meek 2.3% annually.

Here’s the good news. There is almost no chance of this dividend going away. It is a pure ‘buy and hold’ type position. And by “no chance” I mean that this stock has had an increasing annual dividend ever year for 54 years. Let me repeat that, 54 YEARS! No dividend cuts, no dividend suspensions, and a few splits mixed in. How does this company do it, you may be asking? Well Dover falls under the umbrella of industrials but Dover’s personal umbrella is massive. They own over 40 companies, several of which own multiple companies/subsidiaries of their own. These companies make anything from industrial microwaves and refrigerators to beverage can producers to sucker rods (I don’t know what this is either) to diamond drill-hole tools to ATMs to fuel pumps to hydraulic cylinders to garbage truck parts. Dover is practically diversified for you and relatively impervious to small scale industry news. And the role of the people whom run Dover Corp is to simply (probably not as simple as I would think) pick strong companies to acquire and reap the rewards. And given their historical success one can only assume that they are very, very good at it.

Why would someone want to waste their time with such a low dividend when other seemingly equally safe companies are offering dividends in the range of 6-8%? Well, as mentioned the risk is essentially negligible with Dover. They boast a strong balance sheet; stable long term debt, an increase in treasury shares 2 years ago, reliable revenues, and an increase in inventories, which I am not a fan of but it was not by a scary amount. Another reason why this stock is appealing is its relatively low P/E multiple, currently at 19.24, and the forward is around 14. And the last reason is the discount it can be purchased at right now assuming the world comes to some kind of normalcy in the next couple years. There are only 10 analysts on Bloomberg following Dover and the consensus is a buy. 7 of ten have price targets listed and 6 of those are over $60. As you can see below Dover has been affected by the rollback type loses of the last 2 weeks and perhaps $55 is a bit of a pipedream until the growth prospects are further confirmed next quarter but $44 is most certainly a steal.

It should be noted that while not shown above, the 50 day moving average is a good distance from the 100 and the same goes for the 100 to the 200. There to do not appear to be any other blatant technical patterns. The trend line drawn illustrates the anticipation and confirmation of a solid earnings report.

With all of that said I do actually hold a rather large position in this stock and this is of course by no means expected to help it out. Dover’s record date is approaching quickly so we may see a small rise in price followed by a small drop afterwards. And then after that we should see the start of a climb towards $60 with some pitfalls along the way. But say it gets to $60 and you do purchase now, at $44. Even if it takes a year or two, we’re talking 35% capital gains with 2.3% dividends. Reinvest the dividends starting next week and the compounded gains over the next decade will provide a beautiful payoff.


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