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CMI Stock: A Big Potential Buy Among the Industrials

The only time people ever really think about Cummins Inc. (CMI ) is when they see a Dodge truck drive by and recognize the logo on the back. However, investors may want to familiarize themselves with the industrial firm. It’s much more than engines for pick-up trucks and vans.

CMI is the engine producer. It’s a worldwide leader in engines of all sizes, including some of the most powerful mission-critical diesel engines on the planet. What’s more, is that it’s been churning out those engines and related parts since 1919.

That long operating history and dominate position has made Cummins one heck of an industrial leader over its lifespan. And in turn, the last few decades have been great for dividend investors. CMI features one of the best dividend growth profiles around.

That dividend growth – plus its relatively cheap share price – makes it a compelling buy among the rest of the industrials.

The Market Leader

When it comes to building engines, Cummins really doesn’t have too many firms that can compete with it. Caterpillar (CAT ) has toned down its engine division, while others like Navistar’s (NAV) continue to lose market share. With that in mind, the firm enjoys a big-time lead over its rivals and is about 2.5 times bigger than the next largest competitor in the space.

Today, Cummins controls around 40% of the large heavy-duty engine market in North America and around 73% of the medium-duty engine market. And as we said in the opening, those engines don’t just find their way into passenger cars and trucks. CMI’s products can be found in a whole host of construction equipment, tractor trailers, gas-powered generators for utility back-up systems and public transportation.

In addition, the firm also has a major presence overseas and receives roughly half of its revenues from sources outside North America. For example, CMI has been operating in India since the 1960s and its engines are the main component powering the nation’s famed Taj Mahal.

This dominant position as the world’s biggest engine builder continues to provide CMI with a steady source of earnings growth and cash flows. Over the last ten years, CMI has managed to grow its earnings by about 11% annually.

Still Growing

And while engines aren’t necessarily an exciting product, Cummins has made them so with its new growth initiatives.

For starters, the firm is going “green”. Cummins had already been a leader in efficient and clean-burning diesel engines; however, it has continued to improve upon that green stance. The firm has expanded those clean-burning options and made fuel savings a priority. CMI has also expanded into alternative fuels, which includes engines that can run natural gas and landfill gas for power generation. With environmental regulation increasing – especially towards power producers/utilities – Cummins should be able to continue growing in the new operating environment. Those new eco-friendly engines should start turning into real deals overseas as well.

Where overseas? How about China and India? Both markets currently make up a sale slice of CMI’s revenues, but the firm has expanded its efforts in getting its engines into other manufacturers’ products. That includes scoring partnership deals with India’s Tata, as well as various Chinese heavy-equipment manufacturers.

Finally, Cummins has expanded its focus on aftermarket parts and service contracts for engines and generators. Supplying oil filters, spark plugs and other gear for engines keeps a steady flow of cash hitting its bottom line. Service contracts are particularly lucrative, as CMI often gets cash up front and potentially won’t have to hand out any sort of actual service for a long time.

Aiding in Dividend Growth

All of these growth efforts will help underscore CMI’s already-impressive dividend growth. Cummins has managed to pay a steady dividend for the last 25 years. But over the last ten years, it has gotten serious about rewarding shareholders. Its payout has grown by just over 241%. That doesn’t include CMI’s hefty share buyback program.

Today, CMI yield is a very healthy 3.45%.

Also providing support to the dividend is Cummins great balance sheet and cash flow generation from its core engine operations. Without any earnings growth, CMI paid out less than 50% of its earnings back to investors.

Backing in some earnings growth and we can see just how cheap CMI stock is. The firm can currently be had for a song. Cummins forward P/E is under 14. That’s pretty cheap considering its long-term potential.

Buy Some CMI Stock

Now, there are risks for CMI. It’s a cyclical industrial firm after all. If any of the global growth concerns actually turn into something real, CMI could falter. However, the firm’s balance sheet does provide plenty of flexibility, and its dominant position should help insulate it from any real slowdown in the global economy. Manufacturers are still going to give it a call if they need engines. It just might see less calls if things slow down too much.

But even then, investors shouldn’t worry about the dividend.

At the end of the day, Cummins could be a big buy for dividend seekers.