Readers hoping to buy Cummins Inc. (NYSE:CMI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Cummins' shares before the 17th of November in order to be eligible for the dividend, which will be paid on the 1st of December.
The company's next dividend payment will be US$1.57 per share, on the back of last year when the company paid a total of US$6.28 to shareholders. Last year's total dividend payments show that Cummins has a trailing yield of 2.5% on the current share price of $248.17. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Cummins has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Cummins's payout ratio is modest, at just 44% of profit. A useful secondary check can be to evaluate whether Cummins generated enough free cash flow to afford its dividend. It paid out 85% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Cummins's earnings per share have been growing at 10% a year for the past five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.
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 has lifted its dividend by approximately 15% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Should investors buy Cummins for the upcoming dividend? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Cummins looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example - Cummins has 2 warning signs we think you should be aware of.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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