CMI - Cummins: Dividend Raised 18 Years/2.95% Yield - High Quality Industrial

2023-10-10 07:27:22 ET

Summary

• Cummins Inc. is a well-respected OEM known for its high-performing engines and diversified product offerings.
• The company recently separated its filtration business and launched a power business, Accelera energy technology.
• Analysts expect management to focus on product enhancement, growth, and increasing dividends, and the stock has a positive outlook with price targets ranging from $253 to $294.
• The dividend has just raised 7%, giving it an 18-year record, staying near the 5-year 7.5% rate.
• It is a quality fair value buy today at $228 and 3% yield or more.

Cummins Inc. (CMI), formerly known as Cummins Engine Co until 2001, was founded in 1919 is headquartered in Columbus, Indiana is known for quality durable high performing medium and heavy-duty engines. It is a well-respected original equipment manufacturer "OEM" that designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide with exceptional brand loyalty. It offers diesel and natural gas-powered engines along with new parts and services, as well as remanufactured parts and engines with in-shop and field-based repair services. It is quite diversified as it also provides automated transmissions; standby and prime power generators, controls, paralleling systems, and transfer switches, as well as A/C generator/alternator products under the Stamford and AVK brands. It offers electrified power systems with components and subsystems, including battery, fuel cell, and hydrogen production technologies along with environmentally friendly products and systems, such as filtration, aftertreatment, controls systems, air handling systems, automated transmissions, electric power generation systems, and batteries. The fuel cell future for powering data centers and healthcare facilities offers respectable growth prospects. It has an expanding distribution network and excellent after market.

It recently, in 2022, separated its filtration business, naming it Atmus , which is doing well on its own. Cummin, itself, still owns ~80% of it and might offer it in a share exchange offer in the near future.

Accelera energy technology operates under Cummins and was launched March 8, 2023, as a power business with sales expected to evolve and expand quite well into 2027, Link here . Another business, Meritor, was acquired by August 2022 for its axle, brakes and electric vehicles systems found in commercial trucks, off highway, specialty and defense vehicles. This business will be synergistic for Cummins parts and distribution venues and decreasing administrative costs. Both of the newly acquired companies are expected to be synergistic complimenting each other's products and services in time.

Analyst Morningstar "M*" suggests management is expected to continue to be dedicated to product enhancement, growth, raising the dividend along with some stock repurchases.

Cummins continues to hold a very quality S&P credit rating of A+ with debt/ capital at a low 29.5% per FASTgraphs subscriber service "FG".

Price

My price target, since I own it is to add on at a cheap $210 for a yield of 3.2%. If I did not own it buying now near $228 is a great starting purchase.

M* has a fair value on Cummins of $253, while Yahoo Finance has a 12 month out price target of $259. Both very close and the important fact is that they are both up from today.

Below is the CFRA report from the broker TD Ameritrade and it has a $274 price target along with a Buy recommendation.

Value Line analyst has a price target of $294 for early 2025 and gives it a 2-safety rating of very good and financial A+ quality.

Industrial stocks in general are cyclical and Cummins is no exception, thus with it sitting now at ~ $228, it would seem to be a nice fair buy price.

Below is a price and technical chart from Seeking Alpha that shows its upward movement with some cyclical trends and mostly sideways currently.

Dividend

It pays quarterly usually early in the month of March, June, September and December. It just raised the dividend 7% from $1.57 to $1.68 which was just paid September 7th.

The yearly payment is now $6.72 and at the current price gives it a yield of 2.95%. With interest rates on CDs near 5%, this stock might not seem like a screaming buy, but with that 7% raise it becomes more attractive considering it has a 5-year 7.5% dividend growth rate.

Below is the dividend statistics for the last 5 years from "FG".

Earnings

The 8-year FASTgraph "FG" below shows the FAST Facts statistics on the right side of the chart. The earnings per share yield "EPS" is 8.31% and the earnings growth rate is 9.7%; green box to match the dark green area in the chart, which also represents earnings and shows them growing upwards nicely into 2025.

The black line is the price line and shows the cyclical nature of the stock. All dotted lines are estimates. The white line is the dividend line and it is only ~ 38.5% of earnings meaning they are easily covered.

P/E currently is 12x earnings, with a normal (blue line) P/E being 14.71x. It is undervalued by that statistic alone and also makes it a buy now. Earnings are up, as the chart shows, 27% in 2023, 2024 not as robust but with 2025 rising nicely into double digits again.

Summary/Conclusion

Industrial stocks are cyclical and sensitive to the market whims. Right now CMI is in the Goldilocks price chair of not too expensive, however not cheap. It is quality, safe and reliable. It is one I am pleased to own and remain glad to watch it perform well in a time of quite high inflation and as management continues to give it added value with an excellent future outlook. I will add more in time. I have owned it and will continue to do so in Rose's Income Garden "RIG" portfolio of 81 stocks found at The Macro Trading Factory.

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