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Cummins(CMI) – Better than you think it is… for dividends

Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.

The company offers diesel and natural gas powered engines under the Cummins and other customer brands for the heavy and medium-duty truck, bus, recreational vehicle, light-duty automotive, construction, mining, marine, rail, oil and gas, defense, and agricultural markets; and offers new parts and services, as well as remanufactured parts and engines.

Market Cap: $28.3b S&P Rating: A+

Current Situation and past performance… 

Back in the Time, Revenue for FY2012 was $17.3 billion, for FY2017 $20.4 billion, and TTM $24.3 billion – showing long-term growth. EBITDA performance as a whole was slightly better for FY2020, but FY2021 resulted in a total EBITDA margin of 14.6%. It is currently trading at a 3% div. yield, the highest it has been since the Covid-19 market crash. Cummins’ stock is currently in interesting territory, more than can be said about its more famous industrial peer, Caterpillar (CAT).

The current P/E ratio is a decent 16.18. If I look at the past performance as a whole for the last 20 years then on CMI I would have a 17.3% Total Return which is very attractive for a dividend growth company.

As you can see the price dropped under the orange line which is the margin of the safety line. CMI is in the good buy territory.

Dividend standpoint… 

Here we have another good news about the company. Cummins has reported its annual dividend hike during July, it was 8.3%. The current dividend yield is 2.88%. The classic quote says; „Which dividend is the best? The one that was just recently raised!” The company has been increasing its dividends for over 17 years. The current yield is higher than the 5 years average yield(2.63%) on the stock.

The dividend growth rate stayed the same in the last 10 years around 7-8% every year. I consider CMI as a small dividend payer but a grower company so I want the payout ratio under 65%. CMI is doing a good job here, in the last three years it was always under 50%, but before was even lower in the 40% range. Share buybacks can be a silent killer.

If the company does not buy back shares but dilutes them then your investments are worth less over time. It is like a slice of cake where your slice will be smaller if the company dilutes its shareholders. As you expected CMI buys back shares diligently.

2021202020192018
144,600148,200155,400162,200
145,900149,000156,100162,800

Also interesting to see that the company has outperformed the S&P500 on the dividend side. I look just the past 10 years and I can see from the numbers that they paid out 15% more than the S&P500.

Debt

Debt isn’t a thing to worry about. They have a long-term debt/Capital ratio of 29%, and the interest payment on its debt are well covered by the EBIT(31x coverage).

Forecasting and future estimates

Based on 23 analysts the estimated future earnings growth rate is 10%. Analysts have a scorecard also which tells me that they are 46% of the time right about the estimates and 31% of the time CMI has beaten the estimates.

Fair value

I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.

(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $17.280 + $30.545= $47.825 

Equity Value per Share (USD) = Total value / Shares Outstanding = $47.825 / 141= $338.95)

Undervalued by 35.7%. The current fair value is $338.95.

Risks and overall takeaway…

I believe CMI is a very attractive company. Nowadays in the bear market, you can buy many many stocks at discount but some of them do not have value in it. Cummins does. They are also into the new hybrid technology and going slowly but surely green. They are showing very decent numbers to their shareholders, increasing div. yield every year. There is a very much growth opportunity in Cummins. Cummins is in the buy range in my opinion!

Disclosure: I have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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