Sunday, November 8, 2015

Cummins Inc, CMI Newest 2015 Dividend Machine

Add caption

Cummins $CMI, is the newest member of my Dividend Machine portfolio for 2015.  

Over the past 10 plus months I have profiled 16 stocks which, at the time, complied with my four stock picking criteria.

My Dividend Machine work is relevant because ordinary investors need to learn how to find and use basic criteria to pick stocks that have a history of providing solid, ever increasing income.   My criteria are based on these ideas:  

  1. A company should earn more money than it pays out in dividends.
  2. The dividend should have increased on average 4% per year over the past five years.
  3. The stock should deliver at least 3.5% yield on your investment.
  4. You should avoid a stock with a high debt to equity ratio.

Investors can determine if a stock they are considering for the income producing portion of their portfolio meets the above stated criteria through easy to find sources.   Yahoo, MSN, Google, plus your brokerage all have this data available. 

Earnings per Share (EPS)

I use earnings per share to measure if I think a company is earning more money than it pays out in dividends.   Others use difference measures.   For instance free cash flow is more relevant for stocks that have a REIT (real estate investment trust) structure.  

Dividend yield and increases

Yield is determined by both the cash dividend and the stock price.  Stocks can move in and out of the Dividend Machine universe on a weekly maybe even daily basis.  Stock price goes up and yield goes down.   Or sometimes the stock price goes up and so does the dividend so the yield is stable.  

In order to maintain control over the Dividend Machine data, I must stick with my criteria when I add a stock.  The stock must yield 3.5% or more.  Moreover, by rule, the portfolio is long only and no trading occurs.  The model portfolio holds every stock picked forever.  Look at 2011, not bad.

Whereas, on a personal level I may buy a stock that falls short of the yield criteria of 3.5%.   Frankly, in view of the Federal Reserve’s reticence to raise interest rates, I probably should have stuck with 3% as my yield criteria for the 2015 model portfolio but I did not and I must live with it and pick stocks on the stated criteria.   In the previous 4 years of finding Dividend Machines, 3% was my minimum yield.   Perhaps like all investors, I became greedy.

The result of being greedy in yield is you tend to buy within an industry that is suffering, i.e. energy.  The stocks in the 2015 portfolio are energy heavy and therefore prone to price deterioration in today’s market.   Yet for the income investor, yields are good as are some dividend increases.   See the table below.

Dividend increases

Dividend increases are paramount to investors who want to develop a nest egg of stocks that pay some or all of their monthly expenses.   Over time expenses go up and so should your income.

The stock I am profiling today fits all four Dividend Machine criteria and boy am I surprised because I have looked at this stock before and it has not made the grade due to yield.  The answer is that CMI is well off its 52 week high of $150.  Trading at $106.48 on last Friday’s (11/6/2015) close, the yield is now attractive and the dividend increases are compelling.

Is CMI a falling knife?

Cummins Inc. CMI

Let’s look at the Dividend Machine Fundamentals for CMI. I see a stock that I want to own.  EPS $9.34, Dividend $3.90, yield 3.63%, dividend increases far greater than the required 4% and a D/E ratio well below 1 or industry standard.   See the table below.

Now for the icing on this Cummins Cake; on Friday you could have bought CMI around $106, and sold January $115 covered calls for about $1.04.  If they take your CMI you will have received the quarterly dividend and the call premium plus a nice gain.    See the table below.

Should Monday’s trading action provide for selling a call like this at $1.15 I will sell calls on one half of my position.   I am willing to lose some CMI for the current income, but I like it enough that I want to hold it for the prodigious dividend increases and the solid balance sheet.

By dictate, when I add CMI to the 2015 Dividend Machine portfolio on Monday, the recorded price will be the close on Monday, 11/9/2015.


Disclosure:  Adding CMI at $107 or less on Monday and may sell calls