Cummins (NYSE:CMI) Is Paying Out A Larger Dividend Than Last Year

Cummins Inc. (NYSE:CMI) has announced that it will be increasing its dividend from last year's comparable payment on the 7th of December to $1.68. This will take the annual payment to 3.0% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Cummins

Cummins' Earnings Easily Cover The Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. But before making this announcement, Cummins' earnings quite easily covered the dividend. The business is earning enough to make the dividend feasible, but the cash payout ratio of 87% shows that most of the cash is going back to the shareholders, which could constrain growth prospects going forward.

Over the next year, EPS is forecast to expand by 12.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 35%, which is in the range that makes us comfortable with the sustainability of the dividend.

Cummins Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2013, the dividend has gone from $2.00 total annually to $6.72. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Cummins has impressed us by growing EPS at 23% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

In Summary

Overall, this is a reasonable dividend, and it being raised is an added bonus. On the plus side, the dividend looks sustainable by most measures but it is let down by the lack of cash flows. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Cummins that you should be aware of before investing. Is Cummins not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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