Cummins Delivers 14 Years of Consecutive Annual Dividend Hikes with 20%-Plus Average Growth Rate (CMI)
By: Ned Piplovic,
After seven years of flat annual dividend payouts prior to 2006, Cummins, Inc. (NYSE:CMI) embarked on a steep trend of annual dividend hikes and maintained a dividend growth average of more the 20% per year over the past 14 years.
In addition to more than a decade of steep annual dividend hikes, Cummins also offers its shareholders an above-average dividend yield, as well as relatively robust asset appreciation. This combination of capital gains and steady dividend hikes continues to reward the company’s shareholders with double-digit annual total returns in most years.
Cummins’ current dividend payout ratio of 29% indicates that the company uses only a small share of its earnings to cover its dividend distributions. Therefore, Cummins should be able to sustain high annual dividend hikes — even at double-digi- percentage annual rates — for the near future. Furthermore, Cummins’ current 29% payout ratio is just below the lower edge of the 30% to 50% payout ratio range generally considered sustainable. Also, the current ratio is significantly below the company’s own payout ratio average of 47% over the past five years.
Fears that the escalating trade war with China might negatively affect Cummins’ top line are certainly valid. However, Cummins generated only 10% of its revenue from the Chinese market in the first quarter of 2019, as well as full-year 2018. The United States and Canada, with strong economic growth trends, accounted for 60% of the company’s revenues.
Investors interested in taking advantage of Cummins’ rising dividend income, should complete their own due diligence quickly, as the company’s ex-dividend is next week. Cummins will pay its next round of dividend distributions on the June 5, 2019, pay date to all investors who claim stock ownership before the May 23, 2019, ex-dividend date.
Cummins, Inc. (NYSE:CMI)
Headquartered in Columbus, Indiana, and founded in 1919, Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines, as well as offers spare parts and engine-related component products. The company’s Components segment offers emission solutions for stationary and mobile applications. These solutions include catalytic emissions reduction systems, turbochargers for diesel engines, air and fuel filters, lube and hydraulic filters, coolants, fuel additives and fuel systems for heavy-duty on-highway diesel engine applications. Next, the Engine segment manufactures and markets a range of engines under the Cummins and other customer brand names. These engines power trucks, buses and recreational vehicles, as well as light-duty automotive, construction, mining, marine, rail, oil and gas, defense and agricultural markets. Furthermore, the Engine segment provides new parts and services, as well as remanufactured parts and remanufactured engines. The Power Systems segment offers components for primary and backup full power generation solutions, including controls, paralleling systems, transfer switches and air conditioning generator/alternator products under the Stamford, AVK and Markon brands. Lastly, the Distribution segment distributes parts, engines and power generation products. Also, this segment provides service solutions, such as maintenance contracts, engineering services and integrated products.
The current $1.14 quarterly dividend payout is 5.6% higher than the $1.08 payout amount from the same period last year. On an annualized basis, the current dividend payout corresponds to $4.56 per share and currently yields 2.84%. Even with the rising share prices, this dividend yield is 3.1% higher than the company’s own 2.75% average yield over the past five years.
In addition to exceeding its own five-year average, Cummins’ current 2.84% yield outperformed the 1.16% average yield of the overall Industrial Goods segment by 145%. Furthermore, Cummins’ yield is nearly 158% higher than the 1.1% simple average yield of the Diversified Machinery industry segment. Also, as the equity with the third highest yield in the segment, Cummins’ yield outperformed the 1.7% average yield of the segment’s only dividend-paying companies by 67%.
Since embarking on the current streak of 14 consecutive annual dividend hikes in 2006, Cummins has enhanced its total annual dividend payout amount more than 15-fold. This level of advancement corresponds to an average growth rate of 21.5% per year. While the growth rate declined slightly as the dividend amount increases, the dividend’s average annual growth rate over the past five years is still 14%.
While asset appreciation was the main driver, dividend income contributed nearly one-quarter of the 14.1% total returns over the trailing 12 months. The share price suffered a decline of more than 40% in 2014 and 2015, which limited the five-year total returns to merely 16%. However, since the share price hit its five-year low in early 2016, the total return over the three-year period was significantly higher at 53%.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.