Cummins Stock Analysis: Is Cummins A Good Stock To Buy?

Cummins: A Proud Dividend History With Prospects For Good Dividend Growth

Let’s hit the road with my favorite engine maker and work through a Cummins stock analysis and Cummins dividend review.

Cummins stock is one of my long-time investment portfolio holdings. However, Cummins’ dividend growth is heavily impacted by overall economic conditions.

With the ongoing economic uncertainty, let’s put Cummins stock under the microscope today. As always, we will use the Dividends Diversify dividend stock analysis criteria.

This will help me decide if Cummins is a good stock to buy, sell, or hold. And why not answer this important question right away…

Cummins dividend stock analysis

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

IS CUMMINS STOCK A GOOD BUY?

First of all, there is no question that Cummins’ business was temporarily and negatively impacted by the recent recession. Furthermore, Cummins’ stock looks overvalued to me as of the time of this update.

On the other hand, Cummins’ dividend has traditionally represented a nice combination of current dividend yield. And potential future dividend growth.

The company has a long history of generously rewarding shareholders through current dividends, dividend increases, and share repurchases. Also, the dividend appears very safe from a reduction for the foreseeable future.

In addition, Cummins stock is good for diversification purposes. Since many dividend stocks are concentrated in certain sectors of the stock market.

For example, the consumer goods and utilities sectors. In contrast, Cummins operates in the industrial sector.

To conclude, Cummins is a good long-term holding within a diversified dividend stock portfolio. Representing quality stock for dividend investment purposes. But only on price pullbacks from current levels.

Next, let’s dig into the details. That support my views about Cummins stock…

WHAT INDUSTRY DOES CUMMINS OPERATING IN?

Cummins operates in the heavy equipment and automotive industry. They design, manufacture, sell, and service the following:

  • Diesel and alternative fuel engines
  • Diesel and alternative-fueled electrical generator sets
  • Related components and technology

Customers are serviced through a network of

  • Company-owned and independent distributor facilities
  • Thousands of independent dealer locations

The company operates in about 200 countries and territories with thousands of employees worldwide.  Furthermore, 2019 represented a significant milestone.  Because Cummins celebrated its 100 year anniversary of business operations!

Related: 5 high growth dividend stocks

CUMMINS BUSINESS SEGMENTS

The company is organized into distinct but complementary business segments.

CUMMINS ENGINE SEGMENT

The Engine segment designs and manufactures diesel and natural gas-powered engines for on-highway and off-highway use.  The company has a strong brand reputation for diesel engine technology.  Their engines are known for quality, reliability, and innovation.

CUMMINS POWER SYSTEMS SEGMENT

Power Systems offers engines, power generation systems, engine components and services, and alternative-fuel electrical generators.  The products are used across a variety of applications and industries including:

  • Residential standby
  • Commercial industrial
  • Mining
  • Marine
  • Rail
  • Oil and gas
  • Defense
  • Data centers
  • Telecom
  • Healthcare

CUMMINS COMPONENTS SEGMENT

The Components segment is organized around four different businesses.  They provide key technologies for delivering integrated and complementary solutions for customers across Cummins product offerings.

CUMMINS DISTRIBUTION SEGMENT

This segment provides sales, service, and support to customers around the world.  They do this through the largest number of certified service and support locations of any engine manufacturer.

ELECTRIFIED POWER SEGMENT

This is the newest business segment and is very small based on revenues.  The goal of the Electrified Power Segment is to develop and provide fully electric and hybrid powertrain solutions to serve all markets as they adopt electrification. 

Electric power may be the wave of the future. And Cummins wants to give the area special focus as it evolves.

CUMMINS BUSINESS RISKS

Business risks fall in 3 main areas:

Like other industrial sector stocks, Cummins is dependent on the health of the global economy.

When fewer goods are shipped and moved through the economy, demand for freight transportation, and therefore engines decreases.

Cummins customers have begun in-sourcing engine components. This could further harm the engine segment.

Shifting engine technologies toward batteries and automation may negatively impact profits.

CUMMINS STOCK SYMBOL

Finally, Cummins stock trades on the New York Stock Exchange. It operates using the stock symbol CMI (NYSE: CMI).

When I trade (meaning buy and hopefully never sell) my dividend stocks. I use the Webull app. It’s fast and powerful. And has great research tools.

Best of all trades are commission-free. You can learn more about Webull here.

Now with all of that background information out of the way. Let’s dig into our CMI stock analysis.

And first, let’s focus on all the facts and figures regarding the stock dividends.

CUMMINS STOCK DIVIDEND RATE

Cummins stock pays an annual forward dividend of $5.40 per share.

The annual forward dividend is the last dividend payment approved by the company. Multiplied by the number of times a company pays dividends each year.

CUMMINS DIVIDEND YIELD

Based on the recent stock price, that dividend payout puts the Cummins stock dividend yield at 2%.

Regular readers know that I prefer a dividend yield between 3-5%. So, this is a little low for my taste. However, I frequently make exceptions to this rule of thumb.

HOW OFTEN DOES CUMMINS PAY DIVIDENDS?

The CMI dividend is paid every 3 months or 4 times per year. Each quarterly dividend payment is one-fourth of the annual dividend rate. Thus, Cummins is one of many U.S.-based quarterly dividend stocks.

IN WHAT MONTHS IS THE CMI STOCK DIVIDEND PAID?

March, June, September, and December are the months dividends are paid by Cummins.

WHAT IS THE EX-DIVIDEND DATE FOR CUMMINS STOCK?

For an investor to receive the next CMI stock dividend payout, they must complete their purchase before the ex-dividend date. CMI’s ex-dividend date is around the 20th day in the month prior to when it pays a dividend.

The ex-dividend date is slightly different each quarter. So, it’s best to check Cummins’ dividend history page on its investor relations website for the exact date for each payment.

CUMMINS DIVIDEND HISTORY

Cummins has paid higher dividends annually. Ever since it started to raise its dividend regularly in 2006.

This is an impressive dividend record for an industrial company. It makes Cummins a Dividend Achiever stock.

Dividend achievers are companies that have paid higher dividends annually. For at least 10 consectutive years.

CUMMINS DIVIDEND GROWTH RATE

Table 1 shows that past years dividend growth has been strong. You can definitly make your dividends from stock like this.

Table1 : CMI Compound Annual Dividend Growth Rate

1 Year3 Years5 Years7 Years
7.7%7.8%8.5%13.0%

However, Cummins most recent dividend increase was on the low side. Just 3%.

It shows the impact of the recession. And level of business uncertainty the company has encountered.

Variability in or uncertainty about dividend growth can be a downside to dividend stocks. If you need to count on future increases in dividends from company dividend increases.

CUMMINS DIVIDEND POLICY

In past public comments, the company has indicated that they expect to return 75 percent of Operating Cash Flow to shareholders. Combined in the form of dividends and share repurchases.

I would prefer more specific guidance about the dividend. But this information gives us an indication of what may happen. Even though it falls short of a clear dividend policy.

Let’s interpret these facts and others to forecast what future Cummins dividend growth might look like.

CUMMINS DIVIDEND INCREASES VS. SHARE REPURCHASES

This stock’s dividend growth has slowed for several years. Not because of business performance, but due to capital allocation decisions.  Cummins management opted to allocate more cash to share repurchases.

During this time, the Cummins stock price was under pressure and fell significantly.  This indicates to me that management felt the shares were undervalued. And cash was put to better use buying back shares. Rather than increasing the dividend more substantially.

I can appreciate their decision-making about the dividend.  It is better to buy back more shares when the price falls. But, I prefer dividend increases to share repurchases. Because dividends mean making money now.

CUMMINS DIVIDEND GROWTH FORECAST

I develop a dividend growth forecast for all the dividend stocks that I own. It helps me plan my income. This is especially important for me and others who pay living expenses with dividends.

My forecast is based on many of the things we have discussed thus far.

  • Business model and growth prospects
  • Payout ratios
  • Dividend history
  • Historical dividend growth rates
  • Dividend policy (when provided)

Based on these factors, my long-term forecast for average annual dividend growth is 5-7%.

Let’s look at the business fundamentals next.

CUMMINS REVENUE TREND

Revenue has been range-bound over the past several years. First, it was negatively affected early in the last decade as the economy emerged from the great recession.

Then revenues started to grow again. But chart 1 clearly shows the negative impact of the latest recession.

Chart 1: Cummins 7-Year Revenue Trend

Cummins stock analysis: revenue trend

The company’s revenue growth is subject to the health of the global economy.  So, prior to 2020, company revenues benefited from global economic growth during those years.

In addition, Cummins engine and component segments have taken advantage of rising fuel-efficiency standards. And emissions-reduction regulations.

Specifically, as engine technology requirements have strengthened. So has Cummins’ market share.  This, in turn, has benefited the top line.

CUMMINS STOCK DIVIDENDS AND EARNINGS PER SHARE

Until the recession of 2020, earnings per share had grown nicely.

Aggressive use of cash for share repurchases is partly responsible for this growth.  The rest was due to revenue gains and cost efficiencies.

Chart 2: Cummins 7-Year Earnings & Dividends Per Share Trend

Cummins dividend payout ratio

The company’s dividend increases are tied to earnings growth.  This keeps the dividend payout ratio at a reasonable level.

Just 44% for 2020. Even taking into account the drop in earnings.

A lower payout ratio is better for the investor.  It allows the company to maintain the dividend during difficult times.  Or increase it even when earnings are not growing.

Unlike utility stocks, a lower dividend payout ratio is good to see for a more economically sensitive company like Cummins.  It gives me a good reason to believe the dividend is safe from a reduction even during a recession.

But, before I draw a conclusion about Cummins dividend safety, let’s cross-check the dividend payments against free cash flow. And check the companies credit rating.

CUMMINS STOCK DIVIDEND PAYMENTS VERSUS FREE CASH FLOW

Cummins dividends vs. cash flow

Cummins’ free cash flow to cover their dividend payments looks good. The dividend only consumed 36% of available cash during 2020.

CREDIT RATING AND BALANCE SHEET

Moody’s and S&P rate Cummins bonds at A2 and A+, respectively.  Their ratings represent “investment grade low credit risk” evaluations.

A corporation’s credit rating is similar to how your credit score works. By the way, you can check yours for free using Credit Karma if you like.

Credit rating evaluation grid for each major rating agency

And the company’s debt to equity ratio stands at a very conservative .4 to 1.

The Cummins balance sheet and financial position appears very strong and not overly leveraged.

CUMMINS DIVIDEND SAFETY

Cummins has:

  • Modest dividend payout ratios
  • Plenty of free cash flow
  • Strong credit ratings
  • A low debt to equity ratio

Based on these factors, I judge the Cummins stock dividend to be safe from a reduction for the foreseeable future.

Next, we review the stock’s valuation. Then wrap up.

CUMMINS STOCK VALUATION

To put it bluntly, Cummins stock looks overvalued. The stock appreciation has made for solid total investment returns.

Let’s prove this out by looking at Cummins’s stock value from several different angles.

CUMMINS DIVIDEND DISCOUNT MODEL

First, I will use a single-stage dividend discount model to calculate a fair value for Cummins stock price.  The model considers several of the factors discussed thus far.  Specifically,

  • Current dividend payment
  • My estimated long term dividend growth rate
  • My desired annual return on investment – 9%

Using these assumptions, the Cummins dividend discount model calculates the fair value of Cummins stock to be $191 per share.

MORNINGSTAR FAIR VALUE ESTIMATE OF CUMMINS STOCK

The investment research company, Morningstar, estimates the fair value of Cummins stock at $196 per share.

CUMMINS STOCK PRICE TO EARNINGS RATIO

Finally, the Cummins stock price to trailing earnings sits at about 23 times. This isn’t too bad. Especially considering earnings will likely grow in 2021.

SIMPLY INVESTING REPORT VALUE ASSESSMENT OF CMI STOCK

Simply Investing is a great source for dividend stock analysis and recommendations. They make a value decision based on these criteria:

  • Price to earnings ratio
  • Current dividend yield higher than its historical average
  • Price to book ratio

The Simply Investing report considers CMI stock to be overvalued.

CMI stock recommendation
Click to learn more direct from Simply Investing

Read my review about the Simply Investing report

CUMMINS STOCK ANALYSIS CONCLUSIONS

Let’s wrap up today’s Cummins’ stock analysis and dividend review with a few parting thoughts.

For me, Cummins is a long-term buy-and-hold forever dividend stock. As a result, I will look to add to my position in small increments. Especially on any pullbacks in the Cummins stock price.

In the mean time. I will sit back and enjoy collecting my growing passive income from Cummins stock dividend.

FURTHER READING ABOUT DIVIDENDS AND DIVIDEND STOCKS

My Favorite Dividend Investing Resources

The dividend investing resources I mentioned in this article are summarized here for your convenience.

I use all of them. To make the most of my money and investments.

Trade stocks for free using the Webull app
Get dividend stock recommendations from Simply Investing
Use Morningstar for insightful investment analysis
Stock analysis from Motley Fool
Check your credit for free using Credit Karma
Manage your total financial picture for free using Personal Capital

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

I currently own Cummins stock.