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Cummins (NYSE:CMI) Could Be A Buy For Its Upcoming Dividend

Simply Wall St
·4 min read

Cummins Inc. (NYSE:CMI) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 19th of November will not receive this dividend, which will be paid on the 3rd of December.

Cummins's upcoming dividend is US$1.35 a share, following on from the last 12 months, when the company distributed a total of US$5.40 per share to shareholders. Last year's total dividend payments show that Cummins has a trailing yield of 2.3% on the current share price of $236.55. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Cummins can afford its dividend, and if the dividend could grow.

See our latest analysis for Cummins

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cummins paid out a comfortable 49% of its profit last year. A useful secondary check can be to evaluate whether Cummins generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Cummins, with earnings per share up 3.3% on average over the last five years. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Cummins has delivered an average of 23% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Cummins? Earnings per share have been growing moderately, and Cummins is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Cummins is being conservative with its dividend payouts and could still perform reasonably over the long run. Overall we think this is an attractive combination and worthy of further research.

So while Cummins looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Case in point: We've spotted 1 warning sign for Cummins you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

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But that argument misses the point. Yes, there are short-term pressures facing Exxon Mobil. Those aren’t the only pressures, however. In fact, there’s one core problem for Exxon Mobil: the world has changed. And it’s going to be difficult, if not impossible, for this oil giant to adapt. The Fundamental Case for XOM Stock If you look at the numbers, there’s a case to be made for XOM stock. One number to start with is $40. That’s the current per-barrel price of West Texas Intermediate crude. In 2019, on average, Exxon Mobil realized a price of $56.32 per barrel, according to its Form 10-K filing with the U.S. Securities and Exchange Commission. The year before, it was nearly $63. 7 Long-Term Stocks to Buy with the Election Behind Us The impact on earnings is staggering. Per that filing, a $1 move in the weighted-average realized crude price would increase Exxon’s after-tax profit by $475 million. That’s about 11 cents per share. So if (or when) crude bounces back, so will Exxon earnings … and in a big way. The second number is 9.9. That’s the dividend yield generated by XOM stock at the moment (in percentage points, obviously). Meanwhile, management has committed to the payout. And the two numbers can work together. A rebound in crude prices not only boosts earnings, but it puts the continued speculation about a dividend cut to bed. That means investors keep their income, and XOM stock likely gets a boost as well. In that scenario, Exxon can be a big winner. Beyond the Numbers That argument seems to make sense, but I believe it has a critical flaw. It is based on the idea that XOM stock has sold off because crude prices have plunged this year. And that’s simply not the entire story. After all, Exxon still has a market capitalization around $150 billion. It’s big institutional investors who move the stock — and they’re not selling (or putting off buying) the stock because of the size of the dividend. They’re not selling because oil futures went negative in April, or because WTI crude is at $40 at the moment. If they believed that crude was heading back to $60-plus once normalcy returned, they’d be buying XOM stock with both fists. They’re not doing that. And I’d bet that’s because a lot of those big investors indeed are taking the long view. That view can be summarized with a simple question: Can Exxon Mobil grow over time? And increasingly, the answer seems to be “no.” Electric vehicle adoption clearly is going to rise. We’ve seen stocks ranging from manufacturers to suppliers, in the U.S. and elsewhere, simply take off this year. That in turn suggests lower gasoline demand, which pressures Exxon’s upstream (exploration) and downstream (retail) businesses. Chemical demand probably bounces back to some extent, but there’s a shift away from plastics and other oil derivatives. Even natural gas demand probably goes lower over time thanks to renewable growth. Growth Without Growth There really isn’t any part of Exxon Mobil’s business that is untouched by changing demand trends. Those trends didn’t begin in 2020, and they’re not going to end in 2021. If anything, the changes have been accelerated at least in part by the pandemic. And that’s an enormous problem for XOM stock. It’s not impossible for a stock to grow if demand doesn’t; investors call those cases “melting ice cubes.” But there haven’t been too many successful melting ice cubes in recent years. And I’d wager there’s never been a melting ice cube with a market capitalization of $150 billion. Once a business peaks, the stock is going to run into trouble. And so from here, the 2020 trading in XOM stock looks like a realization by the market that the business indeed has peaked. That view suggests that XOM stock has fallen not because investors are distracted by shiny growth stocks, but because they’re correctly focused on a very difficult and dangerous path ahead. On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article. More From InvestorPlace Why Everyone Is Investing in 5G All WRONG Top Stock Picker Reveals His Next 1,000% Winner Radical New Battery Could Dismantle Oil Markets The post The Future for Exxon Mobil Stock Is Just As Bleak As It Looks appeared first on InvestorPlace.

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