Cummins Stock Analysis: Safe And Growing Dividend

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.

Disclosure: This post contains referral links.

I will also cross-check my thoughts with the Simply Investing report. It’s a great resource for identifying the right dividend stocks to buy now.

Is CMI stock a good buy? — *Click the image to learn more about Simply Investing*

WHAT INDUSTRY IS CUMMINS 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 more than 190 countries and territories with almost 60,000 employees worldwide. 2019 represented a significant milestone. Cummins celebrated its 100 year anniversary of the company!

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 under the symbol “CMI”.

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 the CMI stock dividend.

CUMMINS STOCK DIVIDEND YIELD

Cummins stock pays an annual forward dividend of $5.24 per share. Based on the recent stock price, that dividend payout puts the Cummins stock dividend yield at 3.2%.

CUMMINS DIVIDEND HISTORY AND DIVIDEND GROWTH RATE

1 Year	3 Years	5 Years	7 Years
10.4%	7.0%	11.8%	15.4%

In addition to the recent Cummins dividend increases and dividend history, the company has increased its annual dividend payment for 14 consecutive years.

CUMMINS STOCK DIVIDEND GROWTH AND CAPITAL ALLOCATION

In the company’s recent full-year earnings release, they highlighted that they expect to return 75 percent of Operating Cash Flow to shareholders 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.

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

CUMMINS DIVIDEND INCREASES VS. SHARE REPURCHASES

Dividend growth 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. Dividends are hard-earned, honest cash in my pocket.

CUMMINS DIVIDEND GROWTH FORECAST

Starting on a positive note, their 2019 dividend increase was outstanding, at more than 10%.

But due to current economic uncertainty, I have very low expectations for the 2020 dividend increase. I expect only a token raise. And, it may be delayed for 1-2 quarters versus prior years.

But, longer-term, my forecast for average annual dividend growth is 5-7%.

Let’s look at the business fundamentals next.

CUMMINS REVENUE TREND

CMI stock analysis — *Cummins has withdrawn revenue guidance for 2020*

Revenue growth has been steady. It has grown more than 5% annually over the past 6 years.

The company’s revenue growth is subject to the health of the global economy. So, their revenues have benefited from global economic growth over the recent past.

In addition, Cummins engine and component segments have taken advantage of both rising fuel-efficiency standards and emissions-reduction regulations. Specifically, as engine technology requirements have strengthened, so has Cummins market share. This, in turn, has fueled revenue growth.

CUMMINS STOCK DIVIDENDS AND EARNINGS PER SHARE

Cummins stock analysis — *Cummins has withdrawn earnings guidance for 2020*

Earnings per share have grown almost 11% annually over the past 6 years. Aggressive use of cash for share repurchases is partly responsible for this growth. The rest is due to revenue gains and cost efficiencies.

The company’s dividend payments have grown more slowly earnings. These facts have brought the dividend payout ratio to 34% for 2019.

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 free cash flow to cover their dividend payments looks good. The dividend only consumed 31% of free cash flow during 2019.

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.

Credit rating evaluation grid for each major rating agency

And the company’s debt to equity ratio stands at a very conservative .3.

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

CUMMINS DIVIDEND SAFETY

Cummins has:

Modest dividend payout ratios
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.

CUMMINS STOCK VALUATION

Cummins stock looks attractively valued.

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 – $5.24 per share
My estimated long term dividend growth rate – 6%
My desired annual return on investment – 9%

Using these assumptions, the Cummins dividend discount model calculates the fair value of Cummins stock to be $185 per share.

MORNINGSTAR FAIR VALUE ESTIMATE OF CUMMINS STOCK

The investment research company, Morningstar, estimates the fair value of Cummins stock at $170 per share.

CUMMINS STOCK PRICE TO EARNINGS RATIO

Finally, the Cummins stock price to trailing 2019 earnings sits at about 11 times. This is a large discount to the overall market. To compare, the S&P 500 trailing price to earnings ratio based on 2019 earnings is 18 times.

SIMPLY INVESTING REPORT VALUE ASSESSMENT OF CMI STOCK

The Simply Investing report considers CMI stock to be undervalued.

CMI stock recommendation — *Click to learn more direct from Simply Investing*

R ead 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.

IS CUMMINS STOCK A GOOD BUY?

First of all, there is no question that Cummins business will be negatively impacted by the current recession.

On the other hand, Cummins stock looks attractive to me. It represents a nice combination of current dividend yield and potential future dividend growth.

The company has a history of generously rewarding shareholders through dividends and share repurchases. And the dividend appears safe from a reduction.

Cummins stock is also good for diversification since many dividend stocks are concentrated in certain sectors of the market like consumer goods and utilities. In contrast, Cummins operates in the industrial sector.

I will look to add to my Cummins stock position in small increments at the current Cummins stock price levels.

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Disclosure & Disclaimer

This article, or any of the articles referenced here, is not intended to be investment advice specific to your situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.

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