Last update on 2024-06-27

Cummins (CMI) - Dividend Analysis (Final Score: 7/8)

Analyze Cummins (CMI) dividend performance and stability with an 8-criteria scoring system. Final score: 7/8.

Short Analysis - Dividend Score: 7

We're running Cummins (CMI) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Cummins (CMI) has a solid dividend policy based on an 8-criteria scoring system, achieving a score of 7 out of 8. Key points include: a higher than average dividend yield (2.7132% vs. industry average of 1.57%), an impressive average annual dividend growth rate (16.77% over 20 years), and a low average payout ratio (34.8%, though it spiked to 125.3% in 2023). Cummins has also ensured its dividends with generally well-covered cash flows, despite some years of tighter coverage. The company has paid dividends consistently for over 25 years, maintaining stability that's appealing to income-focused investors. Cummins has also been reliable with stock repurchases, enhancing shareholder value. However, the recent spike in payout ratio and past fluctuations in cash flow coverage warrant monitoring.

Insights for Value Investors Seeking Stable Income

Based on the analysis, Cummins (CMI) appears to be a strong candidate for dividend-focused investors. The company's impressive dividend growth rate, consistent payment history, and reliable stock repurchase strategy are strong positives. However, the recent high payout ratio should be watched closely. If you’re looking for reliable long-term dividends and potential growth, Cummins is worth considering, but maintain a watchful eye on future payout sustainability.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield indicates how much a company pays out in dividends each year relative to its stock price. It reflects ROI from dividends, attracting income-focused investors. A higher yield indicates a potentially more attractive investment.

Cummins offers a current dividend yield of 2.7132%, noticeably higher than the industry average of 1.57%. Historically, Cummins' dividend yield has varied significantly, from a low of 0.6752% in 2007 to a high of 3.9882% in 2015, showcasing volatility. Over recent years, the yield has remained above 2%, demonstrating solid returns on investment for shareholders. In contrast, the industry average has mostly hovered around 1-2%. Cummins' higher yield in 2023 suggests a stronger commitment to returning capital to shareholders compared to peers, although the volatility requires careful monitoring.

Average annual Growth Rate higher than 5% in the last 20 years?

The dividend growth rate measures how much the dividend per share has increased on an average annual basis over a specific period. A rate higher than 5% indicates a strong dividend growth history.

Over the last 20 years, Cummins (CMI) has had an average dividend growth rate of approximately 16.77%, according to the provided data. This far exceeds the 5% benchmark, demonstrating a robust trend in increasing dividends. In particular, years such as 2004 (23.0564%), 2010 (25.1429%), and 2011 (51.3699%) highlight significant increases. This consistent double-digit growth is a positive signal, indicating Cummins' strong financial health and commitment to returning value to shareholders. The lower growth rates observed in more recent years, although slightly lower, still surpass the 5% mark, which maintains the company's position as a reliable dividend payer. Therefore, the trend is good, reinforcing confidence in Cummins' capability to sustain and possibly grow dividends further.

Average annual Payout Ratio lower than 65% in the last 20 years?

Average Payout Ratio lower than 65% is an indicator of sustainable dividend payments, demonstrating the company's capacity to reinvest earnings efficiently while returning capital to shareholders. It's essential for risk assessment and long-term financial health.

The average payout ratio for Cummins (CMI) over the last 20 years stands at approximately 34.8%, well below the 65% threshold. Notably, the payout ratio has seen significant variance over the years, spiking to 125.3% in 2023. This recent spike might raise red flags as it indicates the company has paid out more in dividends than it earned. However, given that historical averages and most yearly figures are comfortably below 65%, Cummins shows a consistent ability to sustain dividends. This trend can be interpreted positively for the long-term but warrants a close examination of recent anomalies in payout behavior.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings and why it is important to consider

This criterion checks whether a company's earnings are sufficient to cover its dividend payments. It is important because if dividends consistently exceed earnings, it could indicate potential financial stress for the company. In such a situation, the company might need to cut dividends to maintain financial stability.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow indicate a company's ability to sustain and/or grow its dividend payouts without compromising its operational liquidity. This criterion helps in determining if the company can consistently return value to shareholders, even in less profitable years.

Over the past two decades, Cummins has shown a generally positive trend in covering its dividend payouts with free cash flow with a few periods of tighter coverage. In 2003, the company had a coverage ratio of 0.485, which dipped sharply to 0.097 in 2005, but has subsequently stabilized and improved, reaching 0.817 by 2022. Importantly, years such as 2009 (0.220) and 2012 (0.450) saw substantial challenges in coverage, but recent years have demonstrated stronger performance with ratios above 0.3 since 2015. This increasingly strong ratio signals that Cummins is effectively managing its cash flow to uphold its dividend obligations, enhancing investor confidence. The occasional fluctuations can be attributed to varying free cash flow generation due to economic cycles and investment activities; however, the resilience and gradual improvement in coverage signal a healthy trend. Overall, this trend is favorable for long-term investors looking for reliable dividend income.

Stable Dividends Since the Company Began Paying Dividends?

Why is stability in dividend payments crucial for investors?

Stable dividends are primarily crucial for income-seeking investors who depend on dividends as a regular income source. A steady or growing dividend indicates a company's consistent profitability and balanced capital management, often reflecting a healthy financial position. Unsteady or decreasing dividends could make investors wary, potentially leading to reduced stock prices as doubts may arise about the company's future earnings and growth.

Dividends Paid for Over 25 Years?

This criterion examines whether the company has maintained a history of paying dividends uninterrupted for at least 25 years, which is a strong indicator of financial stability.

Cummins (CMI) meets this criterion by consistently paying dividends from 1998 to 2023. Over these 25 years, the dividend per share grew from $0.275 in 1998 to $6.50 in 2023. The uninterrupted payment of dividends for over two decades underscores Cummins' financial health and commitment to returning capital to shareholders. This trend is excellent as it not only demonstrates the company's resilience through various economic cycles but also its ability to generate and distribute profits consistently. Investors typically regard such a track record as a positive signal for reliable income and long-term return potential.

Reliable Stock Repurchases Over the Past 20 Years?

This criterion examines whether Cummins has consistently repurchased its own shares over the past two decades, which is a crucial indicator of the company’s commitment to return capital to shareholders and manage share dilution. Regular share repurchases often signal that management believes the company's shares are undervalued and it enhances earnings per share by reducing the number of shares outstanding.

Over the past 20 years, Cummins has repurchased shares in 15 of those years. The steady decrease in the number of shares from 2007 onwards—with the count dropping from 199,729,730 shares in 2007 to 141,700,000 shares in 2023—highlights a consistent repurchase strategy. This reduction of approximately 29.09% in shares outstanding is a promising trend for shareholders, as it signals the company’s dedication to returning value. An average annual repurchase rate of -0.2648 further substantiates that Cummins has been reliable in its share repurchase approach. This trend not only reduces share dilution but can also enhance the company's earnings per share, which is often viewed favorably by investors. Overall, Cummins’ ongoing commitment to share buybacks reflects positively on its financial strategy and governance.