For investors aiming to build a portfolio that creates steady passive income, a systematic way to pick stocks is important. One useful tactic uses a multi-factor filter that focuses on a company's capacity to maintain and increase its dividend payments. This technique looks past only seeking the highest yield, which can sometimes indicate hidden problems. Rather, it selects for stocks that join a good dividend profile with solid core business foundations. Important measures contain a high ChartMill Dividend Rating, which assesses yield, growth, and sustainability, together with minimum levels for the ChartMill Profitability and Health Ratings. This confirms that appealing dividends are backed by a company that is financially stable and able to produce regular earnings.
Cummins Inc. (NYSE:CMI), a global leader in designing and making diesel, natural gas, and electric powertrains, appears as a candidate from this structured filtering process. The company's fundamental profile suggests it may deserve more examination from investors concentrated on lasting dividend income.
A Focus on Dividend Quality
The center of this investment strategy is finding companies with a dependable and increasing dividend, not simply a high one. Cummins’s dividend profile shows several positive points that match this goal.
- Reliable History: Cummins has built a steady history, having paid a dividend for at least ten straight years without a cut. This long-term practice is a main sign of management's shareholder-friendly policy and financial discipline.
- Maintainable Growth: The company's dividend has increased at an appealing yearly rate of about 7% over the last five years. More significantly, this growth seems maintainable. The payout ratio—the part of earnings paid as dividends—is at a manageable 38.5%. This keeps a large part of profits to be put back into the business, protecting the dividend during economic slowdowns and aiding future growth.
- Yield in Perspective: With a present yield near 1.36%, Cummins provides a moderate income stream that is higher than the average for its industrial machinery peers. While the yield is less than the wider S&P 500 average, the filtering method emphasizes the quality and growth possibility of the dividend over basic yield, aiming to sidestep the problems of unmaintainably high payouts.
Supporting Fundamentals: Profitability and Financial Health
A lasting dividend must be supported by a profitable and financially strong business. This is why the filtering strategy requires satisfactory scores in profitability and financial health. Cummins does well on these supporting measures.
Profitability is a definite positive for Cummins. The company receives a ChartMill Profitability Rating of 7, showing its capacity to efficiently create returns. Important measures are solid:
- Return on Equity (ROE) of 22.1% is better than over 90% of its industry peers.
- Return on Invested Capital (ROIC) of 12.8% is also with the best in its sector, showing good use of capital.
- Operating margins have displayed positive growth in recent years, giving more proof of operational efficiency.
This steady profitability is the source that pays for the dividend and its growth, directly connecting to the sustainability stressed in the dividend review.
Financial Health is evaluated as acceptable, with a ChartMill Health Rating of 5. The review shows a varied but controllable situation. On the good side, the company’s Altman-Z score shows no short-term bankruptcy risk, and its debt-to-free-cash-flow ratio is good, suggesting it can handle its debts. However, liquidity ratios like the current and quick ratios are near or a little under industry averages. This highlights the value of the filter—it confirms we avoid companies with serious financial flaws while accepting that even stable industrial firms can have normal debt and working capital setups common for their sector.
Valuation and Growth Considerations
When judging a dividend stock for a long-term holding, valuation and growth outlooks cannot be overlooked. Cummins trades at a Price-to-Earnings (P/E) ratio that is about even with both its industry and the wider market. While not very inexpensive, the valuation seems fair when thinking about the company's high profitability and anticipated earnings growth. Analysts forecast earnings per share to increase at an average yearly rate above 16% in the coming years. This growth outlook is important, as it supports future dividend raises and offers a way for possible price gains along with income.
Is Cummins a Fit for Dividend Investors?
Cummins Inc. offers an example of a company that meets a strict, multi-factor dividend filter. It provides a dividend with a confirmed history of growth, supported by a maintainable payout ratio. This income stream is backed by good profitability measures and a satisfactory level of financial health, exactly the mix the filtering strategy tries to find. While the present yield is moderate, the focus on quality, growth, and fundamental strength aims to find companies able to build income over the long term.
For investors wanting to examine other companies that satisfy similar standards of good dividends, acceptable profitability, and financial health, the pre-configured "Best Dividend Stocks" screen can act as a beginning point for more study. A full look at Cummins's fundamental ratings, containing the complete dividend, profitability, and health review, can be seen in its detailed fundamental report.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on current data and past performance, which is not indicative of future results. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
