Cummins' (NYSE:CMI) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Cummins Inc. (NYSE:CMI) has announced that it will be paying its dividend of $1.82 on the 5th of September, an increased payment from last year's comparable dividend. This takes the dividend yield to 2.5%, which shareholders will be pleased with.

See our latest analysis for Cummins

Cummins' Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Cummins' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

The next year is set to see EPS grow by 75.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 30%, 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. The annual payment during the last 10 years was $2.50 in 2014, and the most recent fiscal year payment was $7.28. This means that it has been growing its distributions at 11% per annum over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

Cummins May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Cummins hasn't seen much change in its earnings per share over the last five years.

Our Thoughts On Cummins' Dividend

In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. While the payments look sustainable for now, earnings have been shrinking so the dividend could come under pressure in the future. 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. For instance, we've picked out 1 warning sign for Cummins that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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