Cummins’s (NYSE: CMI) dividend history is long and the dividends keep going up… but will this continue?
Let’s dig into the business, dividend history, and payout safety going forward.
Cummins Business Overview and Highlights
Cummins is a $22 billion company that runs out of Columbus, Indiana. The business employs 58,600 people, and last year Cummins pulled in $20 billion in sales. That works out to $349,000 per employee.
Cummins is in the industrial sector and maintains a S&P credit rating of A+. This helps Cummins issue debt to expand its business and pay dividends.
Earlier this year, Cummins announced the acquisition of Efficient Drivetrain, Inc. This will help accelerate the electrification of its power solutions. This is a strategic move and very forward looking. Demand will grow and profits should rise. This should help support Cummins growing dividend.
Cummins Dividend History Over 10 Years
Cummins paid investors $0.60 per share a decade ago. Over the last 10 years, Cummins’s dividend has climbed to $4.21. That’s a 602% increase. You can see the annual changes below.
The compound annual growth is 21.5% over 10 years… but over the last year, the dividend climbed 5.3%. The slowdown in dividend growth isn’t a great sign. However, Cummins still might be a good income investment. For more insight, let’s check out Cummins’s dividend yield.
Cummins Dividend Yield: Current vs. 10-Year Average
Cummins’s long dividend history makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield – if sustainable – is generally better for buyers.
The dividend yield comes in at 3.44%. That’s above the 10-year average of 2.46%. The chart below shows the dividend yield over the last 10 years.
The higher yield shows that investors have bid down the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield will revert to the mean with share price changes. If the price climbs, Cummins investors will be able to collect both the dividends and big capital gains.
Improved Cummins Dividend Safety Check
Many investors look at payout ratio to determine dividend safety. (This is calculated by taking the dividend per share divided by the net income per share.) So a payout ratio of 60% would mean that for every $1 Cummins earns, it pays investors $0.60.
Payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Cummins’s payout ratio based on free cash flow over the last 10 years.
The ratio is volatile over the last 10 years, and the trend is up. The last reported year shows a payout ratio of 39.6%. This gives plenty of room for Cummins’s board of directors to raise the dividend.
Closing Thoughts: Cummins Dividend History and Safety
Cummins’s dividend yield is well above its 10-year average. The payout ratio also shows that the dividend is safe for now. Cummins is one of the better dividend value plays available in the current market.
If you’re a dividend investor, check out this dividend reinvestment calculator. It’s a powerful tool that’s free to use.
Good investing,
Rob
