The Dover (DOV, Financial) board of directors increased its quarterly cash dividend to 47 cents per share Friday, an increase of 3 cents or 7% from the previous 44 cents per share and the 62nd consecutive year of increases.
Dover's shares have gained 18% in the last 12 months.
Dividend yield
Dover is attractive for income investors for its high dividend yield. The dividend yield stands at 2.03% and is ranked higher than 65% of the 1,852Â companies in the Global Diversified Industrials industry.
The company paid out $268.4 million worth of dividends over the past year. During this period, total free cash flow from operations was $862 million. With this cash generation, the dividend yield is sustainable in the future.
During the past 12 months, the company's average dividend per share growth rate was 4.80% per year and almost doubled to 9.50% per year in the past 10 years.
Multi-Step Dividend Discount Model
Let's analyze my discounted dividend model in which I will try to be clear in the assumptions. First, I looked up the current WACC of the machinery industry provided by Professor Aswath Damodaran: 7.35% for the discount rate.
Now, starting with a dividend per share of $1.76, I will assume a dividend increase of 9.5% for the first year (as the average of 10 years). After that, I will consider an H-model, which assumes a growth rate that starts high and then declines linearly.
The growth rates are:
| Year | Value | g(t) |
| 1 | g(1) | 9,50% |
| 2 | g(2) | 8,43% |
| 3 | g(3) | 7,36% |
| 4 | g(4) | 6,28% |
| 5 | g(5) | 5,21% |
I used linear interpolation between g(1) and g(5) to calculate g(2), g(3) and g(4). The last growth rate, g(5), was calculated with the Gordon Growth Model Formula: g = (P0 x r – D0) / (P0 + D0) = (86.54 x 7.35% – 1.76) / (86.54 + 1.76) = 5.21%
Now we can proceed to discount the future cash flows, considering time value of money, to find the intrinsic value:
| Year | Value | Cash flow | Present value |
| 0 | Div 0 | 1.76 | Â |
| 1 | Div 1 | 1.93 | 1.795 |
| 2 | Div 2 | 2.09 | 1.813 |
| 3 | Div 3 | 2.24 | 1.813 |
| 4 | Div 4 | 2.38 | 1.795 |
| 5 | Div 5 | 2.51 | 1.760 |
| 5 | Terminal Value | 123.34 | 86.518 |
| Intrinsic value | Â | Â | 95.49 |
| Current share price | Â | Â | 86.54 |
| Upside Potential | Â | Â | 10% |
Year 1 dividend = 1.76 x 1,095 = 1.93 and so on.
Conclusion
Financial modeling gives us an upside potential of 10%, ahead of the recent 3% on Friday. We must note that modeling always carries the risk of taking the right inputs.
Disclosure: The author holds no position in any stocks mentioned.
