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Dividend Investing Stocks (Archived)

CMI - Cummins, Inc.

Dividend investing is a popular strategy with investors seeking an income stream. Dividend investors can be placed into two broad categories.

  1. The growth approach - buy dividend paying stocks with emphasis on the company's ability to grow and increase its future dividend payments (to maximize the future yield).
  2. The yield approach - buy dividend paying stocks at cheap prices (to maximize the current yield).

Dividend investors using the growth approach tend to look for the same basic growth characteristics as found with growth investing, but the stock must also pay a reasonably reliable dividend.

Dividend investors using the yield approach tend to be more concerned with the stock price and the companies ability and willingness to pay a regular dividend rather than its ability to expand.

Sometimes a company will satisfy the requirements for both approaches.

In the May 2015 issue a fundamental analysis is conducted on a selected sample of stocks. The analysis is based on fundamental data from one year ago. This allows financial students and investors to see how the stock price performed over the next 12 months after the hypothetical purchase.

Cummins, Inc.

Cummins, Inc. NYSE:CMI is a large-cap company that operates in the commercial vehicles industry and its stock trades around $220 million per day. CMI is a mature company that was founded in 1919 and has a long established history of paying dividends.

The key fundamentals for CMI are shown below.

Growth fundamentals for CMI

YearRevenueEPS ROEDividendBook ValueEmployees
200484301.90 25%0.307.6028100
200599102.96 30%0.3010.0033500
2006113003.45 26%0.3513.5034600
2007130003.65 22%0.4716.9037800
2008143003.75 23%0.6516.0039800
2009108002.13 11%0.7018.7034900
2010132005.25 22%0.9623.6039200
2011180009.63 34%1.4628.6043900
2012173008.65 25%1.9034.8046000
2013173008.00 20%2.3840.5047900

The fundamental data above shows that CMI has broadly increased its revenue, earnings, dividends and book value over the last decade. These are the characteristics of an expanding company which indicates that CMI is a growth stock that pays a regular dividend. The annual dividends have increased for every year over the last decade.

Fundamental Analysis for CMI:

The return on equity is good and averages around 20%. The profit margin (profit to revenue ratio) is fair and averages around 6%.

The current ratio (current assets to current liabilities) ranges from 1.8 to 2.5 which indicates that CMI has a sufficient amount of working capital.

The debt ratio (long-term debt to tangible assets) averages around 0.7 which means that CMI carries a moderate amount of long-term debt. Intangible assets and goodwill are not included in the ratio calculation. The tangible assets are used for the ratio calculation because these are hard physical assets that can be sold off in the event of bankruptcy liquidation whereas intangibles and goodwill cannot be sold.

The total ratio (total liabilities to total assets) around 50% which means that CMIs total debt is 50% of its total assets.

The revenue for the 2014 fiscal year is projected to grow at 10% (based on the five year revenue growth trend). The earnings growth for the 2013 fiscal year is projected to grow at 14% (based on the five year earnings growth trend).

The forward PE ratio is around 13 (calculated from the five year earnings growth trend rather than from forecast earnings). The forward PEG is around 0.8.

The current business valuation would drop to around $23 with no earnings grow (with a 2.7% ten year Treasury bond yield).

CMIs book value is around $40 and if CMI does run into financial problems in the future this gives an idea of how far the stock price could drop.

The bankruptcy risk can be calculated using the Z-score. CMIs Z-score is 6.3 which means CMI is a very low bankruptcy risk stock.

The sample analysis uses data that is one year old. The hypothetical purchase date for the stock is 21-Apr-2014 and this allows the reader to see how the stock performed over the next year.

Overall the fundamentals are strong with this large-cap dividend paying stock which has some growth characteristics as a bonus. Additional information such as consensus forecast earnings, broker recommendations and insider transactions are not considered for this sample analysis. A hypothetical position taken in CMI on the 21-Apr-2014 would give a purchase price of around $147.

The stock price performance is shown below in Chart 1. along with the annual earnings year to year growth. The stock chart is adjusted for splits and dividends.

Chart 1. Stock chart with earnings for CMI

weekly Chart CMI

As shown in Chart 1. above, CMIs loat around 8% over the next year including dividends. CMIs 2014 annual earnings increased by 14% over the 2013 fiscal year and its 2014 dividends were $2.97 which is an increase of 25% over the 2013 annual dividend.

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