Dover Corporation (NYSE:DOV) isn't the most glamorous stock on the market, but that doesn't mean you can't make money by holding it over the long-term. In fact, there's a compelling case for buying the dividend aristocrat -- Dover has raised its dividend for 62 consecutive years -- and I think recent results only served to strengthen it. Let's take a closer look at Dover and why it might be worth adding to your portfolio.

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Spinoff will add value

Dover is traditionally known for being the industrial stock with heavy oil & gas exposure. As you can see below, the company used to generate more than 35% of its profits from its energy segment. However, the decline in energy prices hit Dover's sales to drilling and production customers so hard that by the end of 2016 the energy segment contributed less than 6% of segment earnings.

full year segment profit

Data source: Dover Corporation presentations. Millions of U.S. dollars

The bounce in energy capital spending helped energy earnings recover significantly in 2017, and the segment contributed nearly 15%. However, that's not the really big news about the segment: Dover plans to spinoff its upstream energy business, called Wellsite, in 2018. Wellsite contributed around 70% of the energy segment's revenue.

This makes Dover more investable, for three key reasons:

  • Dover Corporation will be more attractive to investors that don't want exposure to the cyclicality of the oil & gas industry.
  • While Dover's segment earnings are actually down 1.6% since 2013, if you exclude energy they're up nearly 30%, a compound annual growth rate of 6.7% -- basically, Dover's non-energy growth performance in the last few years has been good.
  • The bounce in the energy segment -- expected to grow 12%-14% in 2018 -- suggests Dover will be able to get a good price and generate good value for shareholders.

On track with mid-term guidance

In June of last year management laid out some aggressive-looking projections for revenue growth and margin expansion in the 2016-2019 period. In short, the projections call for 4%-6% organic revenue growth with operating margin expanding 350 basis points to 450 basis points -- for reference, 100 basis points is equal to 1%. Consequently, analysts have EPS rising 14.7% and 10.2% in the next couple of years (incidentally, these figures include Wellsite).

On the recent fourth-quarter earnings call, CEO Bob Livingston affirmed that, "We are firmly on track to achieve our three-year revenue and margin targets" -- good news for investors.

Margin expansion

As noted above, a key part of Dover's plan includes aggressive margin expansion, and there are a couple of takeaways from the recent earnings which suggest Dover can hit its targets.

First, each segment generated adjusted segment margin expansion in the fourth-quarter.

Segment Adjusted Margin

Q4 2017

Q4 2017

Growth (bp)





Engineered Systems








Refrigeration & Food Equipment




Data source: Dover Corporation presentations.

Second, Livingston had good news for anyone concerned with how rising raw material costs are holding back margin growth at industrial companies. Answering a question from JPMorgan's Steve Tusa on the earnings call, he disclosed that Dover "had a negative headwind of almost $15 million," but thanks to actions taken in 2017 "we see a $13 million to $15 million tailwind in our guide on material versus price" in 2018.

Good exposure to cyclical capital goods spending

Hopes are high for a pickup in capital goods spending in response to President Trump's Tax Cuts and Jobs Act. Companies from FedEx Corporation to Emerson Electric are highlighting the positive sentiment in the business environment. If the expected improvement occurs, Dover is well positioned to profit. For example, 70% of Dover's revenue is non-recurring, and 80% of that is "either capital goods or components we manufacture that go into capital goods. And a significant percentage of that 80% is U.S. based," according to Livingston on the earnings call.

In other words, Dover could see a significant boost in earnings if capital spending picks up in the U.S.

A good value stock

Last but definitely not least, Dover's valuation is attractive. Management is forecasting adjusted free-cash-flow (FCF) in 2018 equivalent to 10%-11% of revenue (figures include Wellsite). Based on the midpoint of guidance, assuming the analyst consensus forecast for $8.16 billion in revenue produces a FCF figure of $857 million, meaning that based on the current stock price of $102 Dover trades on 18.4 times forward FCF.

That's a good value for a stock with double-digit earnings prospects in the next few years.The company's on track with its impressive looking mid-term targets, and the Wellsite spinoff will reduce cyclical risk. Throw in some upside potential from an increase in capital goods spending and Dover is an attractive stock for investors to consider.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Emerson Electric and FedEx. The Motley Fool has a disclosure policy.