Cummins Inc, symbol CMI,  a subject of many posts. on this income investing blog is the subject again.

CMI belongs to the 2016 Dividend Portfolio.  We have a Dec. $130 call working. Today, CMI traded as high as $138.77 but closed at $134.74.   With our $130 call working, I would not be surprised if we lost CMI.  But the call buyer has not yet executed the option although they are in the money.

What will happen?

Our basis is $118.50.  We banked a call premium of $1.75. Lucky for us (or is it good planning) CMI is ex-dividend on 11/17/2016 so they have to take our shares before 11/17 or we get the dividend of $1.025.

With the controversial news (see link) perhaps the call buyer will not execute the option out of fear that the price will fall further.  Here are our options:

Should the owner of this call execute the right to buy our shares before the ex-dividend date 11/17, our gain is.



Should the call buyer execute their option after the ex-dividend date  11/17 at $130 our gain is.



We have only two outcomes.  We own the stock at the end of the expiration date or we do not. If we still own it, we know what we have but if we lost it what is our loss?

Lost Opportunity

Lost opportunity means we are losing out on potential future price appreciation.  The option buyer is already in the money.   Some will argue that CMI is on a roll and will continue to be on a roll.  They argue this dip is an opportunity to buy.   Selling a call on your shares at $130 was silly.  Even on the dip, CMI  is $134.  You would be better off to hold the share through thick and thin.  I argue that we all can win.

December Expiration

We still have until December 16.  We cannot sell our shares before then as we are under contract.  Maybe the stock price continues to decline . We are under contract, we have to keep it until the call expires which means the stock price could go to zero.  That is a silly thought.

How likely is it that CMI will drop below our basis of $118.50 is a serious thought.  I think that scenario is highly unlikely but it is possible.  On the other hand, CMI could rebound and be well above $130 when the call expires the call buyer takes our shares but we all win  Just look at the tables above.


If CMI is $129 when the call expires, we will mostly likely retain our shares and have another chance to sell another call at a wonderful premium.  Select your call wisely and you will get the dividend too.

Next Steps


I am looking to add to CMI and sell a call.  Today I could add CMI at $134 and sell a January $145 for $1.45.  If I buy before 11/17,  I will get that dividend as well.




I even looked at a March Call.  We would get two dividends plus the call premium.



But you must realize the risk of being in contract and unable to sell if your stock dives.  You must understand if you buy such a good stock that you can get increasing strike prices and increasing call premiums, that you will lose it to the call buyer; lost opportunity.

I like these options.




Good Income Investing.

M* Money Madam

Disclosure:  Long CMI with calls

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CMI $130 December Call

Cummins Inc, symbol CMI,  a subject of many posts. on this income investing blog is the subject again.

CMI belongs to the 2016 Dividend Portfolio.  We have a Dec. $130 call working. Today, CMI traded as high as $138.77 but closed at $134.74.   With our $130 call working, I would not be surprised if we lost CMI.  But the call buyer has not yet executed the option although they are in the money.

What will happen?

Our basis is $118.50.  We banked a call premium of $1.75. Lucky for us (or is it good planning) CMI is ex-dividend on 11/17/2016 so they have to take our shares before 11/17 or we get the dividend of $1.025.

With the controversial news (see link) perhaps the call buyer will not execute the option out of fear that the price will fall further.  Here are our options:

Should the owner of this call execute the right to buy our shares before the ex-dividend date 11/17, our gain is.



Should the call buyer execute their option after the ex-dividend date  11/17 at $130 our gain is.



We have only two outcomes.  We own the stock at the end of the expiration date or we do not. If we still own it, we know what we have but if we lost it what is our loss?

Lost Opportunity

Lost opportunity means we are losing out on potential future price appreciation.  The option buyer is already in the money.   Some will argue that CMI is on a roll and will continue to be on a roll.  They argue this dip is an opportunity to buy.   Selling a call on your shares at $130 was silly.  Even on the dip, CMI  is $134.  You would be better off to hold the share through thick and thin.  I argue that we all can win.

December Expiration

We still have until December 16.  We cannot sell our shares before then as we are under contract.  Maybe the stock price continues to decline . We are under contract, we have to keep it until the call expires which means the stock price could go to zero.  That is a silly thought.

How likely is it that CMI will drop below our basis of $118.50 is a serious thought.  I think that scenario is highly unlikely but it is possible.  On the other hand, CMI could rebound and be well above $130 when the call expires the call buyer takes our shares but we all win  Just look at the tables above.


If CMI is $129 when the call expires, we will mostly likely retain our shares and have another chance to sell another call at a wonderful premium.  Select your call wisely and you will get the dividend too.

Next Steps


I am looking to add to CMI and sell a call.  Today I could add CMI at $134 and sell a January $145 for $1.45.  If I buy before 11/17,  I will get that dividend as well. 




I even looked at a March Call.  We would get two dividends plus the call premium. 



But you must realize the risk of being in contract and unable to sell if your stock dives.  You must understand if you buy such a good stock that you can get increasing strike prices and increasing call premiums, that you will lose it to the call buyer; lost opportunity.

I like these options.




Good Income Investing.

M* Money Madam

Disclosure:  Long CMI with calls

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Cummins, Inc CMI another covered call

I love a stock like CMI, Cummins, Inc.   I have recently written about two lots of CMI.  I bought one lot in June at $105.60 and immediately sold a September $120 call that just expired.  I added another lot in September at $118.84 and sold a December $130 call that is still working.  

Today, I sold calls on the first lot.  I chose a December $130 strike and received a $1.75 premium.  The December expiration date is after the next expected ex-dividend date.  The data are presented below.




CMI, good income investing.

M*
Disclosure:  Long CMI with laddered calls

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CMI Cummins

I bought at the most recent entry point then sold June $105 and $110 calls.

If fundamentals catch up like this author shows occurred in 2010, CMI will be added to the 2016 portfolio.

Stay tuned. M* MONEYMADAM

Cyclical Investing: A Cummins Case Study http://seekingalpha.com/article/3976934?source=ansh-d $CMI, $EMR

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Cummins revs up our income

I considered selling this call on Cummins, Inc. (CMI.)



137 days is a bit far out for me to go with a covered call.  For those of you who think Cummins, CMI, is a solid enough stock to take this "time" risk, look at the juicy return.

A September call provides for three income payments; (1) the call premium, (2) the May dividend and (3) the August dividend.  And, it places your shares under contract so you can't sell them if you need or want to.   Moreover, the stock could soar and you would miss out on selling two shorter calls. 


P/E is a touch over 14 so you may be paying a fair price if you added today and sold this call.


Good Income Investing

M*TheMoneyMadam

Disclosure:  Long CMI with calls

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Cummins Inc. CMI could be the next M* 2016 Dividend Stock but it is not

When I review my personal portfolio, which I do quite often, and compare it with the portfolios I wrote about, I always wish I had bought every stock I profiled especially in 2011.   In 2011 stocks were cheap compared with now.  That portfolio is up by over 60%.   On the other hand, had I bought every stock profiled in 2014 when the market was at a high, the results would not have been as good.  2014 is up 2% and 2015 is flat.  Perhaps in 4 or 5 years, these portfolios will be up like the early portfolios.

I made a change in 2016 and every stock I add to the portfolio I bought at the price profiled.  I also sold every call described.   The 2016 portfolio is not a model portfolio, it is reality.  So far so good as the combined return is up 15%.   This includes the cash generated from paid dividends, covered call option premiums and capital gains.

Adding Cummins Inc. symbol CMI

Today, I am adding to my stake in CMI but it fails to make the grade for the 2016 stable.  Cummins Inc. symbol CMI, has made quite a move since I added it to the 2015 portfolio.  Full disclosure, I bought it at that time with a cost basis of $105.20.   When CMI sunk to $79.88 a share in mid January, I looked like a fool. I liked it well enough personally to add to my personal position.   At that time, I did not add it to the 2016 portfolio because no covered calls were available and because revenue growth just misses my 4% hurdle.  More on that below.

Cummins Dividend Growth

I am adding to my CMI position again today at the elevated price of $108.90.  My reasons for adding CMI  is the dividend growth.   The next ex-dividend date is 5/19/2016; the quarterly dividend is $.975 for a yield of 3.58%.   The dividend growth over the past five years has averaged 60% per year.  Dividends paid in 2010 were $.875 for the year and in 2015 $3.51 for the year. That is phenomenal.  As an income investor, I really need robust dividend growth and CMI has it.




Revenue Growth

Revenue growth is the big change I made for 2016.  I added that metric to improve the chances that both dividends and price would go up.   Revenues drive earnings and earnings drive dividends and often times stock price.  This is not a perfect predictor, however, as noted above, CMI's stock price really suffered in mid January in spite of the revenue growth.  Yet, the stock price has returned to a more normal level recently. 

 


While I go back five years to compare dividends, I restrict revenue growth to three years.  I want to know what is happening now.   CMI's 2012 revenues were $17,334 (m) and in 2015 revenues were $19,110 (m).  That is a revenue growth rate of 3.42% per year.  Not quite the 4% I want.  Notice that dividend growth exceeds revenue growth.  Moreover, EPS is not parallel to either dividends or revenues.   Every investor needs to think about that.  EPS can be altered by efficiencies or factors such as currency exchanges.

Cummins Covered Call

Selling covered call options boosts income.  They can also help reduce the pain when a stock as good as CMI tanks like it did in January.   When the call expires and when the stock takes off again, you can sell more calls for more income.   A well structured call should provide at least 8.5% capital gain should the stock be called away.

Another metric, in addition to revenue growth, that I added in 2016 is the availability of covered calls.   Today, CMI has a call that expires in June, which means I will most likely receive the May dividend which will be paid before the call expires.  The strike price of $120 is 10.19% above my cost basis and the premium of $1.25 is another 1.147% of yield.



Balance Sheet

Just as important as finding a stock with a good yield, good growth, and covered call options, is finding a stock with a solid balance.  A solid balance sheet implies that even when the overall market tanks and takes down the prices of even the best stocks, the company will survive to pay the dividend.

I use debt to equity ratio (D/E) as the quickest way to determine if a stock has a strong enough balance sheet.   Again, it may not be a perfect measure but the data are readily available from MSN Money or YCharts.   For the purist, you can go to the company's website and peruse the financial statements to determine if you think the company is on solid financial footing.  Cummins carries a D/E ratio of .2213 and this is very good.  Anything below 1 is excellent.

CMI Fundamentals Table

The Table below presents all the data I used to make CMI my next 2016 stock.   Consider CMI for the income producing portion of your portfolio.



M* TheMoneyMadam

Disclosure:  Long CMI with calls

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