For investors aiming to build a portfolio that creates steady passive income, a systematic screening process is important. One useful technique is to select for stocks that provide a good dividend profile and also show basic financial soundness. This method looks past a high yield by itself, favoring companies with a solid record of dividend payments, manageable payout ratios, and the earnings and financial condition needed to keep and possibly raise those dividends. By concentrating on these linked traits, investors can try to find companies with a lower chance of reducing payouts in difficult economic periods, offering a steadier income flow.
Cummins Inc. (NYSE:CMI), a worldwide company in the design and making of engines, power generation systems, and similar technologies, appears as a candidate from this kind of screening process. The company’s basic profile indicates it matches the main points significant for dividend-focused investors.
A Good and Steady Dividend Profile
The main attraction of CMI for income investors is its long-standing dividend, which receives a good ChartMill Dividend Rating of 7 out of 10. This rating combines a number of important elements that support a consistent income flow.
- History of Growth: Cummins has a steady history, having paid and, notably, not reduced its dividend for at least ten years. Also, the dividend has increased at an average yearly rate near 7% over the last five years, showing a dedication to giving more value to shareholders.
- Manageable Payout: Sustainability is key, and CMI performs well here. The company uses about 38.5% of its earnings for dividend payments, seen as a low and very workable payout ratio. This provides significant capacity to put money back into the business, handle economic shifts, and keep financing the dividend without difficulty. The report also states that CMI’s earnings are rising quicker than its dividend, adding more support for the sustainability of its present policy.
- Yield Perspective: With a present yield near 1.57%, CMI’s income return is acceptable but not striking by itself. Still, this yield is a bit higher than the average for its industrial machinery group. For investors using a "dividend growth" plan, the regular yearly raises can be more important over many years than a high but unchanging yield.
Supporting Basics: Earnings and Financial Condition
A lasting dividend needs to be backed by a profitable company and a sound balance sheet. This is why selecting for acceptable profitability and condition ratings is a vital part of the method, it helps steer clear of "value traps" where a high yield signals basic business trouble. CMI’s report shows it fits these supporting points.
- Sound Profitability (Rating: 7): Cummins displays strong earnings measures, which create the profits required to finance shareholder returns. Main strong points are:
- A Return on Equity (ROE) of 22.12%, placing it with the top in its field.
- An acceptable Return on Invested Capital (ROIC) of 10.92%, which is higher than the company’s cost of capital and also shows an upward direction compared to its three-year average.
- A good Operating Margin of 12.01%, showing efficient activities.
- Sufficient Financial Condition (Rating: 5): The company’s financial condition presents a varied but generally sufficient view. Good aspects contain a strong Altman-Z score of 4.50, pointing to a very small short-term risk of financial trouble, and an acceptable Debt-to-Free-Cash-Flow ratio of 3.34. Some points to note contain a Debt-to-Equity ratio (0.62) and liquidity measures (Current and Quick Ratios) that are near or a little under industry averages, showing a fair but workable level of debt and liquidity.
Price and Growth Points
While the dividend, profitability, and condition traits are central to the screening idea, a complete view needs looking at price and growth outlook.
- Price: The stock seems fairly to fully priced based on common measures. Its Price-to-Earnings (P/E) ratio of 21.63 is less expensive than many industry peers but is about equal to the wider S&P 500. The report’s Valuation Rating of 3 implies investors are paying a higher price for the company’s quality and stability.
- Growth Path: CMI’s Growth Rating of 4 shows a change. While revenue growth has been slight and is predicted to weaken, the company is forecast to produce better earnings per share (EPS) growth above 15% each year in the next few years, indicating possibility for improved earnings and efficiency.
Conclusion
For dividend investors using a screen that stresses quality and sustainability, Cummins Inc. offers a strong case. It is not a high-yield idea, but instead one of reliability, growth, and sound basic support. The company’s very good history of raising payouts, along with a low payout ratio and strong profitability, indicates its dividend is well-secured. The sufficient financial condition rating gives more assurance of its durability.
A closer look at the company’s full basic analysis is always suggested, which you can examine in detail through the ChartMill Fundamental Report for CMI.
Cummins was found using a systematic screening plan centered on dividend quality, profitability, and financial condition. If you want to examine other companies that fit similar points, you can use the same screen to see the present results: View the "Best Dividend Stocks" Screen.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. Always conduct your own research and consider your individual financial circumstances and risk tolerance before making any investment decisions.
