There's A Lot To Like About Cummins' (NYSE:CMI) Upcoming US$1.31 Dividend

NYSE:CMI) is about to go ex-dividend in just two days. Ex-dividend means that investors that purchase the stock on or after the 20th of August will not receive this dividend, which will be paid on the 3rd of September.” data-reactid=”28″>Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Cummins Inc. (NYSE:CMI) is about to go ex-dividend in just two days. Ex-dividend means that investors that purchase the stock on or after the 20th of August will not receive this dividend, which will be paid on the 3rd of September.

Cummins’s next dividend payment will be US$1.31 per share. Last year, in total, the company distributed US$5.24 to shareholders. Based on the last year’s worth of payments, Cummins has a trailing yield of 2.5% on the current stock price of $213.51. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Cummins can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Cummins ” data-reactid=”30″>Check out our latest analysis for Cummins

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Cummins’s payout ratio is modest, at just 46% of profit. A useful secondary check can be to evaluate whether Cummins generated enough free cash flow to afford its dividend. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.

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.

here to see the company’s payout ratio, plus analyst estimates of its future dividends.” data-reactid=”37″>Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 4.6% 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.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Cummins has increased its dividend at approximately 22% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Cummins an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Cummins is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Cummins is halfway there. Cummins looks solid on this analysis overall, and we’d definitely consider investigating it more closely.