It Might Not Be A Great Idea To Buy Cummins India Limited (NSE:CUMMINSIND) For Its Next Dividend

Cummins India Limited (NSE:CUMMINSIND) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 17th of August to receive the dividend, which will be paid on the 21st of September.

Cummins India's next dividend payment will be ₹7.00 per share, on the back of last year when the company paid a total of ₹17.00 to shareholders. Based on the last year's worth of payments, Cummins India stock has a trailing yield of around 3.3% on the current share price of ₹422.15. If you buy this business for its dividend, you should have an idea of whether Cummins India's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Cummins India

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Cummins India paid out 55% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Cummins India generated enough free cash flow to afford its dividend. Over the past year it paid out 166% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cummins India paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Cummins India's ability to maintain its dividend.

Click here to see how much of its profit Cummins India paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Cummins India's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Cummins India has lifted its dividend by approximately 5.0% a year on average.

The Bottom Line

Is Cummins India worth buying for its dividend? It's not great to see earnings per share have been flat and that the company paid out an uncomfortably high percentage of its cash flow over the past year. Cash flows are typically more volatile than earnings, but this is still not what we like to see. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Cummins India.

With that in mind though, if the poor dividend characteristics of Cummins India don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Cummins India that we strongly recommend you have a look at before investing in the company.

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.

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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.
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