This Undervalued Blue Chip Dividend Stock Reports This Week And Should Rebound In 2014

Feb. 1.14 | About: Cummins Inc. (CMI)

Unlike the stocks in most of our recent articles, this week's focus stock isn't a high dividend stock. However, it has used its strong cash flow to reward its shareholders over the past five years - it sports a dividend growth rate of over 400% since 2007, and it has also reduced its share count by 6%:

Profile: Cummins Inc., (NYSE:CMI), a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generations systems.

CMI is fairly diversified geographically, with 52% of its revenue coming from North America:

Over the long term, Cummins has outperformed its peers and the S&P 500 since 2007:

Recent Performance: However, over the past year, CMI has underperformed the S&P, and the broad Industrials sector, and is currently oversold:

Earnings Rebound Ahead: What happened? CMI's 2013 earnings are estimated to fall to $7.56, from $8.61 in 2012. However, the future looks a lot brighter for CMI in 2014 and 2015, and it currently looks undervalued on a PEG basis. (CMI will report its Q4 and full year 2013 earnings on 2/6/14):

CMI also looks undervalued on a P/E basis, but it still commands premium Price/Tangible Book and Price/Sales valuations:

CMI's internal estimates bode well for the next few years, due to a combination of acquisitions in its rapidly-growing distribution segment, and a strong CapEx investment in R&D. CMI should be able to capitalize upon the US natural gas boom as its customers increasingly switch over to its new natural gas engines. The early adopters of this technology are customers with fixed routes, which are assured of fueling supplies. However, as more companies, such as Royal Dutch Shell, (NYSE:RDS.A) (NYSE:RDS.B) and Clean Energy Fuels (NASDAQ:CLNE) build natural gas service stations in the US, these engines will be in increasing demand to a broader range of customers.

Dividends: CMI increased its quarterly dividend from $.50 to $.625 in August 2013, and it has a very low dividend payout ratio, in addition to its 33%-plus 5-year dividend growth rate. This dividend growth should continue as CMI plans to split its ample operating cash flow 50/50 between Capex and Stock Buybacks and Dividends.

Options: If you're looking for more income over the short term, you may want to consider selling covered calls above CMI's price/share. This September $130 strike price pays $9.20 well over 4 times CMI's next 3 dividends:

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The catch is that, if CMI's price/share takes off, you'll still only receive $1.80/share in price gains. You can see more details for this and over 30 other trades in our Covered Calls Table:

Selling Puts: A more conservative approach is to sell cash secured puts below CMI's price/share. You'll receive a similar option premium amount, $9.30, but no dividends. However, your breakeven will be $115.70, nearly 10% below CMI's $128.20 price/share. Another idea would be to wait and check out the market's reaction to CMI's earnings report on 2/6/14. If, for some reason, the market doesn't like the report, it may overreact, and create an even cheaper price/share for CMI, in which case, you may be able to achieve an even lower breakeven via selling pus at that time.

You can learn more details for this and for over 30 other trades in our Cash Secured Puts Table.

Financials: CMI has superior numbers across the board for these metrics:

Disclaimer: Author had no positions in CMI, as of yet, at the time of this writing.

Disclaimer: This article was written for informational purposes only.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CMI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.