Dividend Investor Portfolio #8: Engines of Growth
1
Dear Investor,
Welcome to the 8th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
1
1
Market-Moving News: May 13, 2024
Last week was rather uneventful, with not much to report in terms of market-moving news. Investors were in waiting mode ahead of this week’s crucial consumer and producer price indexes. Consumer health will also be in focus, with retail sales data scheduled to be published this week and earnings from two major retailers in the spotlight.
Still, markets were encouraged by last week’s unexpected jump in initial weekly jobless claims, which rose to their highest level since August. This was widely viewed as an indication that the U.S. labor market continues to cool, supporting the Federal Reserve’s hand in their battle with the sticky inflation. The markets now see a significant chance for a rate cut in September, despite the continued hawkishness reflected in some rate-committee members’ comments.
All major indexes rose in the past week, led higher by the blue-chip Dow Jones Industrial Average (DJIA). The 30-member blue-chip index was supported by a strong performance in most of its components, with only three stocks subtracting from its gains. However, the S&P 500 (SPX) is also doing quite well, with over 80% of its members registering gains so far in May. The benchmark large-cap index rose to within 1% of its March high.
1
1
This Week’s Quality Dividend Stock Idea
Cummins, Inc. (CMI) is an American multinational industrial corporation that designs, manufactures, and distributes engines, as well as power generation products. Known for its high-performance products, the company produces engines for various applications, including trucks, buses, generators, and marine vessels. CMI’s products also include diesel, natural gas, electric and hybrid powertrains and powertrain-related components, electric power generation systems, batteries, electrified power systems, hydrogen generation, and fuel cell products, among others. It also services engines and related equipment.
1
Heavy-Duty Innovator
Cummins was established in 1919 in Columbus, Indiana, as the Cummins Engine Company. Since its founding, the company has been at the core of engine and fuel system design innovation. The company came to the public limelight in the 1930s when one of its models became the commercial trucking industry’s leading engine. It was so successful, that iterations of the model became a fixture on U.S. highways for the next 70 years.
In 2001, the company changed its name to Cummins, Inc., to signify the development of power generation and filtration business lines. Thus, in the 2000s, CMI became a U.S. government contractor, supplying the DoD with mobile power generators. However, engine manufacturing remained its main line of business, albeit undergoing many changes. Thus, Cummins was among the first producers to introduce diesel-electric hybrid engines in 2006. In fact, the company outran Tesla to produce the world’s first electric heavy-duty truck in 2017.
1
Global Power Leader
The company began publicly trading on the NYSE in 1947. In the 1950s, Cummins began its international expansion, and by 2005 its international sales eclipsed its U.S. business. The company has also embarked on a business expansion path through internal growth and innovation, as well as multiple acquisitions. Today, Cummins serves its customers in more than 190 countries globally.
With a market capitalization of over $40 billion and annual revenues of more than $34 billion, the company ranks #146 on the Fortune 500 list. The company is the world’s largest independent engine producer, as well as the global power technology leader. CMI delivers a variety of reliable power systems used in critical applications globally – from data centers and oil and gas fields to backup electricity supply for private homes.
1
Robust Performance, Strong Finances
Cummins is a financially healthy company, with a medium-low net debt-to-equity ratio and strong debt and interest coverage ratios. The company’s debt is highly rated: “A” at S&P and “A2” at Moody’s. CMI’s balance sheet strength is a cornerstone of the company’s resilience against economic downturns and financial volatility.
Notably, S&P reduced Cummins’ rating from “A+” in December despite its appraisal of CMI’s strong financial position. This followed a settlement to pay an air pollution fine of $2 billion (despite the company’s stance that there was no wrongdoing). The fine will mostly be disbursed in cash during 2024, though it was already charged to Q4 2023 earnings. The credit rating agency said it sees increased regulatory and climate transition risks. However, we believe that the settlement is a one-time event, as the well-managed industry leader is projected to take all required precautions in the future.
CMI features strong profitability metrics, surpassing its peer averages on returns on investment, assets, and equity. While it has seen a decline in sales in the past year – which was expected due to the macroeconomic headwinds – its margins stayed intact, underscoring the company’s robust capital efficiency. Thanks to its market leadership, Cummins has been able to raise prices to offset lower volumes and increased R&D expenses. CMI continues to invest heavily in the products and technologies that will create advantages in the future.
This year, Cummins has completed the spin-off of its filtration business into a separate company, Atmus Filtration Technologies. CMI has also proceeded with its restructuring plans, aimed at simplifying its operating structure and improving the long-term efficiency of its business. Though these separation and restructuring costs have negatively affected the company’s results in the short term, they are expected to help CMI grow its lead in the global innovative power solutions market.
1
Dividend Contender
Cummins has been paying dividends since 1985, increasing them annually for the past 19 years. This track record gives CMI the status of a “Dividend Contender”, reserved for companies that are on their way to becoming Dividend Aristocrats. In the past decade, dividends grew at a ~10% annual rate, slowing to about 7% in the past three years, as the cash payouts reached a substantial level.
CMI’s 2.3% dividend yield is much higher than the average for its sector. The payouts are expected to continue growing at a healthy clip of 5%-6%. This outlook is supported by the company’s strong finances, as well as by its very moderate earnings and cash flow payout ratios.
1
Total Return in Focus
Cummins is committed to a stated long-term strategic goal of returning 50% of operating cash flow to shareholders through dividends as well as buybacks. In the near term, the company’s capital allocation strategy is focused on the payment of dividends and debt reduction, as well as investing in expansion to support further profits. CMI performed heavy buybacks through the end of 2022 but has since held back. However, with the sales outlook brightening and the fine having been addressed, the company may soon resume its share repurchases.
Meanwhile, beyond dividends, CMI’s shareholders have been rewarded by share price appreciation. Despite declining from an all-time high reached in April, Cummins’ stock has gained over 37% in the past 12 months. However, it remains attractively valued, with the P/E below the average for both the Industrial sector and the Machinery industry. Furthermore, based on projected cash flows, the company trades about 10% below its fair value.
1
Investing Takeaway
Cummins is an industrial powerhouse with a long history of innovation and industry leadership. Its 100+ year history of business expansion, strong financial position, and robust performance support the outlook for continued earnings and dividend growth for years to come. The stock’s current moderate valuation provides an opportunity to include this power play in long-term income portfolios.
1
1
Dividend Investor Portfolio
1
Portfolio News
¤ LyondellBasell (LYB) said it has begun a strategic review of the European assets of two of its business units, Olefins & Polyolefins and Intermediates & Derivatives. The review is aimed at evaluating the units through the lens of the company’s strategy to concentrate its portfolio and reinvest around businesses with long-lasting competitive advantages in order to generate superior returns at a meaningful scale.
¤ Qualcomm (QCOM) saw its license to export 4G and certain other integrated circuit products to China’s Huawei revoked by the U.S. Department of Commerce. The company said it had anticipated ceasing revenue from Huawei by the year’s end, and the revocation merely accelerates this timeline. Qualcomm reiterated its FQ3 guidance, signaling confidence in its business stability.
¤ Ex-Dividend dates for Kroger Company (KR) and Amgen (AMGN) are May 14th and May 16th, respectively.
¤ Allianz (ALIZY) is expected to publish its Q1 2024 results on May 15th. Analysts expect 3.5% year-over-year growth in earnings-per-share.
1
Recent Trades
None at the moment, although we are considering adding a stock to our portfolio. Stay tuned.
1
Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.70% | 8.47% | $3,698.00 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Jun 14, 2024 | Jul 01, 2024 | 2.18% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2024 | May 13, 2024 | 5.25% | $1.50 |
| Amgen (AMGN) | May 16, 2024 | Jun 07, 2024 | 3.23% | $9.00 |
| BlackRock (BLK) | Jun 07, 2024 | Jun 23, 2024 | 2.68% | $20.40 |
| Edison International (EIX) | Mar 27, 2024 | Apr 30, 2024 | 4.29% | $3.12 |
| JPMorgan Chase (JPM) | Jul 05, 2024 | Jul 31, 2024 | 2.20% | $4.60 |
| Kroger (KR) | May 14, 2024 | Jun 01, 2024 | 2.02% | $1.16 |
| LyondellBasell (LYB) | May 26, 2024 | Jun 06, 2024 | 5.03% | $5.00 |
| Philip Morris (PM) | Jun 22, 2024 | Jul 11, 2024 | 5.82% | $5.20 |
| Qualcomm (QCOM) | May 30, 2024 | Jun 20, 2024 | 2.03% | $3.40 |
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
