Stock Analysis: Donaldson Company, Inc (DCI)

This article originally appeared on The DIV-Net December 8, 2008.

Linked here is a PDF copy of my detailed analysis of Donaldson Company, Inc (DCI) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Donaldson Company operates as a worldwide manufacturer of filtration systems and replacement parts.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

DCI is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, DCI is trading at a 21.1% discount. DCI earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

DCI earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. DCI has paid a cash dividend to shareholders every year since 1956 and has increased its dividend payments for 21 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

DCI earned no Stars in this section. The NPV MMA Diff. of the $109 is below the $7,500 minimum I look for in a stock that has increased dividends as long as DCI has. If DCI grows its dividend at 15.0% per year, it will take 15 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. The 15 years is more than the 10 years maximum I like to see.

Other: DCI is a member of the Broad Dividend Achievers™ Index. At the end of November, DCI lowered its fiscal 2009 earnings outlook, anticipating a stronger dollar and possibly weaker demand. The company, which has benefited for several years from the weak dollar, adjusted its full-year outlook "due to the combination of exchange rates and weaker customer demand."DCI also reported an 11 percent increase in net income for its fiscal first quarter, outpacing Wall Street expectations on the strength of its aerospace and defense, industrial and gas turbine businesses.

Conclusion: DCI earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks DCI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $20.00 for DCI's NPV MMA Differential to hit the $7,500 that I like to see. At that price the stock would yield 2.27%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I'm looking for, the calculated rate is 19.6%. This dividend growth rate is significantly above the 15.0% used in this analysis.

DCI is an interesting stock as a potential value investment. However, the numbers don't add up as a dividend investment.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in DCI (0.0% of my Income Portfolio) .

What are your thoughts on DCI?


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