Cummins Is One Of The Safest And Smartest Ways To Profit From This $130 Trillion Megatrend
Summary
- The recent market freakout over Omicron has sent the world's best blue-chips plunging.
- That includes Cummins, which is one of the safest and smartest ways to profit from the $130 trillion renewable energy megatrend.
- CMI is down 22% and in a bear market, trading at a 17% discount to fair value.
- This hyper-growth Ultra SWAN is a potentially strong buy and as close to a perfect dividend growth investment as you can find on Wall Street today.
- Analysts expect CMI to deliver almost 18% long-term returns and 18% over the next five years. Combined with BTI, you can enjoy a very safe 5.8% yield and nearly 16% long-term return potential. At the end of the day, a thorough examination of CMI's fundamentals results in just one conclusion. Buy Cummins now before everyone else does.
- This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »
Kativ/E+ via Getty Images
Renewable energy is a megatrend that you shouldn't ignore.
Morgan Stanley expects EV sales to grow at a torrid rate through 2040 and by 2050 represent almost 100% of global vehicle sales.
(Source: LGGNY Investor presentation)
The International Energy Agency estimates that renewable energy in total could represent a $130 trillion global investment opportunity.
For prudent investors who know how to avoid speculative manias, and practice disciplined financial science, there is a fortune to be made.
But buying extremely overvalued EV stocks is not the safest way to cash in this $130 trillion potential bonanza.
For example, Rivian (RIVN), which is 20% owned by Amazon (AMZN), and 12% owned by Ford (F), recently hit a peak market cap of $150 billion, with $50 million in pre-orders.
That's 3,000X forward sales (multiple years), and today it trades at 2,000X forward sales.
It doesn't take a genius to figure out that paying 2,000X sales (never mind earnings that aren't expected for many years) is likely to end badly for momentum traders.
However, there is a surprising hyper-growth blue-chip that can let you safely and intelligently profit from the $130 trillion renewable energy opportunity.
Believe it or not, diesel engine maker Cummins (NYSE:CMI), is in fact, one of the safest and most prudent ways for long-term income investors to cash in on renewable energy.
All while avoiding the speculative manias and dangerous bubbles that are the cornerstone of this rapidly growing and exciting space.
That's especially true now that one of the world's highest quality hyper-growth blue-chips has plunged 23% from its highs, fueled largely by fears over Omicron slowing the global economic recovery.
But as we'll soon see, Cummins has survived far worse than this pandemic and helped make patient long-term investors a fortune over the decades.
So let's take a look at the four reasons why Cummins might be just what your diversified and prudently risk-managed dividend growth portfolio is looking for, to get rich from green energy.
In fact, as this report will make clear, there is only one conclusion that a thorough examination of Cummins can reach.
Buy Cummins now before everyone else does.
Reason One: Quality You Can Trust In All Economic Conditions
The Dividend King's overall quality scores are based on a 220 point model that includes:
dividend safety
balance sheet strength
credit ratings
credit default swap medium-term bankruptcy risk data
short and long-term bankruptcy risk
accounting and corporate fraud risk
profitability and business model
growth consensus estimates
cost of capital
long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters'/Refinitiv and Just Capital
management quality
dividend friendly corporate culture/income dependability
long-term total returns (a Ben Graham sign of quality)
analyst consensus long-term return potential
It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.
credit and risk management ratings make up 38% of the DK safety and quality model
dividend/balance sheet/risk ratings make up 79% of the DK safety and quality model
How do we know that our safety and quality model works well?
During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.
How does Cummins score on one of the world's most comprehensive and accurate safety models?
Dividend Safety
| Rating | Dividend Kings Safety Score (133 Point Safety Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In Pandemic Level Recession |
| 1 - unsafe | 0% to 20% | over 4% | 16+% |
| 2- below average | 21% to 40% | over 2% | 8% to 16% |
| 3 - average | 41% to 60% | 2% | 4% to 8% |
| 4 - safe | 61% to 80% | 1% | 2% to 4% |
| 5- very safe | 81% to 100% | 0.5% | 1% to 2% |
| CMI | 85% | 0.5% | 1.80% |
Long-Term Dependability
| Company | DK Long-Term Dependability Score | Interpretation | Points |
| Non-Dependable Companies | 18% or below | Poor Dependability | 1 |
| Low Dependability Companies | 19% to 57% | Below-Average Dependability | 2 |
| S&P 500/Industry Average | 58% (58% to 67% range) | Average Dependability | 3 |
| Above-Average | 68% to 77% | Very Dependable | 4 |
| Very Good | 78% or higher | Exceptional Dependability | 5 |
| CMI | 84% | Exceptional Dependability | 5 |
Overall Quality
| CMI | Final Score | Rating |
| Safety | 85% | 5/5 very safe |
| Business Model | 80% | 3/3 wide moat |
| Dependability | 84% | 5/5 exceptional |
| Total | 85% | 13/13 Ultra SWAN |
CMI: 99th Highest Quality Master List Company (Out of 508) = 81st Percentile
(Source: DK Safety & Quality Tool) updated daily, sorted by overall quality
The DK 500 Master List includes the world's highest quality companies including:
All dividend champions
All dividend aristocrats
All dividend kings
All global aristocrats (such as BTI, ENB, and NVS)
All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)
- 40 of the world's best growth stocks (on its way to 50)
CMI's 85% quality score means its similar in quality to such blue-chips as
- British American Tobacco (BTI) - global aristocrat
- Merck (MRK)
- 3M (MMM) - dividend king
- Medtronic (MDT) - dividend aristocrat
- Costco (COST)
- BlackRock (BLK)
- Alphabet (GOOG)
- Hormel Foods (HRL) - dividend king
- Bank of Nova Scotia (BNS)
- V.F. Corp (VFC) - dividend aristocrat
- Philip Morris International (PM) - dividend king
Basically, among the world's highest quality companies, CMI is of higher quality than 81% of them.
That's high praise indeed and here are the objective facts to back it up.
Cummins was founded by Clessie Lyle Cummins and William Glanton Irwin in 1919 and in Columbus, IN.
This is a 102-year-old company that has withstood
- a world war
- a global flu pandemic that wiped out 5% of humanity
- two depressions
- 19 recessions
- the Financial Crisis
- the COVID pandemic
- interest rates ranging from 0.5% to 16%
- inflation rates ranging from -10.3% to 15%
In other words, Cummins is a company that's adaptable, built to last, and will probably outlive us all.
How about the dividend dependability? The dividend growth streak is 15-years and Cummins hasn't cut its dividend in 30 years. That's compared to the 20-year Ben Graham standard of quality.
CMI Credit Ratings
| Rating Agency | Credit Rating | 30-Year Default/Bankruptcy Risk | Chance of Losing 100% Of Your Investment 1 In |
| S&P | A+ stable outlook | 0.60% | 166.7 |
| Moody's | A2 (A equivalent) stable | 0.66% | 151.5 |
| Consensus | A stable outlook | 0.63% | 158.7 |
(Source: S&P, Moody's)
Fitch withdrew its rating in 2017 (CMI didn't want to pay $500K per year for it), and that final rating was A stable.
The risk of losing all your money buying CMI today is 0.63% or 1 in 159, over the next 30 years.
CMI Leverage Consensus Forecast
| Year | Debt/EBITDA | Net Debt/EBITDA (2.5 Or Less Safe In This Industry According To Rating Agencies) | Interest Coverage (10+ Safe) |
| 2020 | 1.32 | 0.10 | 22.69 |
| 2021 | 1.05 | 0.19 | 25.71 |
| 2022 | 0.93 | 0.09 | 29.93 |
| 2023 | 0.87 | -0.06 | 33.19 |
| Annualized Change | -12.97% | NA | 13.52% |
(Source: FactSet Research Terminal)
CMI's fortress balance sheet is expected to keep getting stronger over time. With cash exceeding debt by 2023.
CMI Balance Sheet Consensus Forecast
| Year | Total Debt (Millions) | Cash | Net Debt (Millions) | Interest Cost (Millions) | EBITDA (Millions) | Operating Income (Millions) | Interest Costs |
| 2020 | $4,102 | $3,401 | $302 | $100 | $3,108 | $2,269 | 2.44% |
| 2021 | $3,968 | $3,138 | $720 | $117 | $3,770 | $3,008 | 2.95% |
| 2022 | $3,918 | $3,283 | $374 | $115 | $4,224 | $3,442 | 2.94% |
| 2023 | $3,868 | $4,061 | -$251 | $111 | $4,446 | $3,684 | 2.87% |
| Annualized Growth | -1.94% | 6.09% | NA | 3.54% | 12.68% | 17.53% | 5.59% |
(Source: FactSet Research Terminal)
CMI's average borrowing cost is 2.54% and analysts expect that to remain under 3% despite rising long-term interest rates.
(Source: FactSet Research Terminal)
The Bond Market Loves Cummins
(Source: FactSet Research Terminal)
The "smart money" on Wall Street is so confident in CMI's long-term future it's willing to lend to it for over 76 years at 4.05%.
Basically, the bond market says CMI will be around in 2100, successfully transitioning to a green energy future.
CMI Credit Default SWAP Spreads
(Source: FactSet Research Terminal)
Credit default swaps are insurance against bond defaults, and thus represent a real-time bond market estimate of a company's short and medium-term bankruptcy risk.
Despite the price declining rapidly in recent weeks, the bond market has become more confident, not less in CMI's fundamentals.
In fact, the bond market now estimates a risk of 0.8647% that Cummins will go bankrupt in the next decade. The odds of CMI going under in the next year? Just 1 in 1464.
- analysts, rating agencies, and the bond market all agree the thesis remains intact
CMI Historical Profitability
(Source: Gurufocus Premium)
CMI's industry-leading profitability has remained stable for over 30 years, confirming a wide and stable moat.
CMI Trailing 12-Month Profitability Vs Peers
| Metric | Industry Percentile | Major Industrials More Profitable Than CMI (Out Of 2,656) |
| Operating Margin | 65.03 | 929 |
| Net Margin | 72.59 | 728 |
| Return On Equity | 95.38 | 123 |
| Return On Assets | 86.07 | 370 |
| Return On Capital | 87.99 | 319 |
| Average | 81.41 | 494 |
(Source: Gurufocus Premium)
Despite the pandemic chaos, CMI's profitability has remained among the best in the industry.
CMI Margin Consensus Forecast
| Year | FCF Margin | EBITDA Margin | EBIT (Operating) Margin | Net Margin | Return On Capital Expansion | Return On Capital Forecast |
| 2020 | 11.1% | 15.7% | 11.5% | 9.0% | 1.10 | |
| 2021 | 8.2% | 15.6% | 12.5% | 9.8% | TTM ROC | 44.24% |
| 2022 | 8.8% | 16.3% | 13.3% | 10.4% | Latest ROC | 46.6% |
| 2023 | 9.5% | 16.5% | 13.7% | 10.6% | 2023 ROC | 48.5% |
| 2024 | NA | NA | NA | NA | 2023 ROC | 51.1% |
| 2025 | NA | NA | NA | NA | Average | 49.8% |
| 2026 | NA | NA | NA | NA | Industry Median | 13.1% |
| Annualized Growth | -4.90% | 1.67% | 6.06% | 5.51% | CMI/Peers | 3.81 |
| Vs S&P | 3.93 |
(Source: FactSet Research Terminal)
FCF margins are expected to fall as CMI ramps up growth spending to take full advantage of the renewable energy gold rush. But overall margins are expected to improve including returns on capital that are 4X its peers and the S&P 500.
(Source: Gurufocus Premium)
Return on capital is Joel Greenblatt's gold standard proxy for quality and moatiness. CMI's ROC has been doubling every decade for three decades.
CMI Dividend Growth Consensus Forecast
| Year | Dividend Consensus | FCF/Share Consensus | Payout Ratio | Retained (Post-Dividend) Free Cash Flow | Buyback Potential | Debt Repayment Potential |
| 2021 | $5.58 | $13.60 | 41.0% | $1,155 | 3.49% | 29.1% |
| 2022 | $5.88 | $15.34 | 38.3% | $1,362 | 4.12% | 34.3% |
| 2023 | $6.14 | $17.99 | 34.1% | $1,706 | 5.16% | 43.6% |
| Total 2021 Through 2023 | $17.60 | $46.93 | 37.5% | $4,223.52 | 12.78% | 106.44% |
| Annualized Rate | 4.90% | 15.01% | -8.79% | 21.55% | 21.55% | 22.33% |
(Source: Gurufocus Premium)
- 15-year dividend growth streak
- the last dividend cut was in 1991
- 30 years without a dividend cut vs 20+ year Ben Graham standard of quality
40% is the safe payout ratio for this industry. CMI's payout ratio became temporarily elevated in the pandemic but is expected to fall to very safe levels by 2023.
Its retained post-dividend cash flow through 2023 could pay off all of its debts or buy back 13% of its stock, giving it a buyback growth potential of 4% to 5% per year.
- consensus buybacks from 2021 through 2023: $5.533 billion
- 16.7% of existing shares at current valuations
- 5.9% CAGR
Basically, Cummins is hands down one of the highest quality companies on earth. And it's also one of the fastest-growing.
Reason Two: An Incredible Growth Runway Powered By Renewable Energy
How on earth can Cummins be thriving when we seem to be hearing nothing but calls to end fossil fuel usage immediately?
The company's strategy focuses on delivering a comprehensive solution for original equipment manufacturers. We believe Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to growing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its after-treatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, we expect the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it's economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. We've seen this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. We think some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins.
Cummins has exposure to end-markets that have attractive tailwinds. In trucking, we think new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer-term, we think Cummins will continue to invest in BEVs and fuel cells to power future truck models. We believe a zero-emission world is inevitable, but we believe Cummins can use returns from its diesel business to drive investments." - Morningstar (emphasis added)
Cummins has actually benefited from rising regulations because it has the economies of scale to invest in innovation and help truckers and locomotive makers remain compliant.
CMI spends nearly $1 billion per year on R&D to maintain its technological edge over peers.
Continued investment in its new power business is also on the horizon, aimed at increasing the viability of hydrogen as an alternative power solution for numerous use cases.
The company's strategy is to invest in BEVs and fuel cells to power commercial trucks in the future. These moves illustrate Cummins' commitment to investing in next-generation products that are built for a zero-emission world. While some peers have either exited the industry or had major product failures, Cummins' management team has been a good steward of the business, steadily investing in research and development to improve product performance, leading to market share gains." - Morningstar
(Source: Investor presentation)
Cummins has always thrived by skating to where the puck is going.
(Source: Investor presentation)
Fuel cells and hydrogen are a potentially massive growth opportunity.
(Source: Investor presentation)
(Source: Investor presentation)
(Source: Investor presentation)
1 KG of hydrogen is approximately equal to 1 gallon of gas. CMI is working on hydrogen production at a cost of $2 to $3 per gallon.
(Source: Investor presentation)
(Source: Investor presentation)
Management estimates a $3.15 trillion total addressable market for hydrogen.
- that's 159X CMI's 2020 sales
While CMI will likely only win a fraction of this, you can see the reason for management and analyst optimism about a green energy future.
Can Cummins eventually replace all its diesel sales with renewables? Analysts are very optimistic that it can.
CMI Long-Term Growth Outlook
(Source: FactSet Research Terminal)
- 14.3% to 18.0% CAGR growth consensus range
Smoothing for outliers historical analyst margins of error are 50% to the downside, and 33% to the upside.
- 7% to 24% CAGR adjusted growth consensus range
(Sources: FAST Graphs, FactSet Research)
CMI is expected to keep growing at a similar rate to the last 11 and 16 years.
OK, so we have one of the world's highest quality dividend blue-chips, that's battle-tested through 102 years of economic turmoil, and industry disruption.
And it's also growing at a hyper-growth rate. Surely such a marvelous company must be trading at a premium right? Wrong. Today CMI represents not only a Buffett-style "wonderful company at a fair price" but a wonderful company at a wonderful price.
Reason Three: A Wonderful Company At A Wonderful Price
(Source: FAST Graphs, FactSet Research)
For 20 years, outside of bear markets and bubbles, tens of millions of investors have paid 14 to 15X earnings for CMI.
- pricing in the cyclicality of earnings and cash flows
- 91% probability that this is a reasonable estimate for intrinsic value
| Metric | Historical Fair Value Multiples (13 Years) | 2020 | 2021 | 2022 | 2023 | 12-Month Forward Fair Value |
| 13-Year Median P/S | 1.28 | $171.39 | $215.17 | $231.04 | $240.38 | |
| 5-Year Average Yield | 2.77% | $190.61 | NA | NA | $221.66 | |
| 13-Year Median Yield | 2.32% | $227.59 | $250.00 | $250.00 | $264.66 | |
| 25- Year Average Yield | 2.26% | $233.63 | $256.64 | $256.64 | $271.68 | |
| Earnings | 14.52 | $176.88 | $233.85 | $273.75 | $294.81 | |
| Owner Earnings (Buffett Smoothed Out FCF) | 14.25 | $119.49 | $210.32 | NA | NA | |
| Operating Cash Flow | 11.25 | $205.47 | $217.81 | $240.80 | $257.43 | |
| Free Cash Flow | 16.19 | $238.45 | $221.78 | $257.97 | $293.91 | |
| EBITDA | 10.07 | $169.71 | $263.69 | $290.85 | $299.98 | |
| EBIT (operating income) | 12.60 | $155.66 | NA | NA | $306.78 | |
| Average | $181.31 | $232.10 | $255.99 | $269.44 | $254.15 | |
| Current Price | $211.64 | |||||
Discount To Fair Value | -16.73% | 8.82% | 17.32% | 21.45% | 16.73% | |
Upside To Fair Value (NOT Including Dividends) | -14.33% | 9.67% | 20.95% | 27.31% | 20.09% | |
| 2021 EPS | 2022 EPS | 2021 Weighted EPS | 2022 Weighted EPS | 12-Month Forward EPS | 12-Month Average Fair Value Forward PE | Current Forward PE |
| $13.70 | $15.93 | $1.05 | $14.70 | $15.76 | 16.1 | 13.4 |
CMI is about 17% undervalued right now, and trading at just 13.4X forward earnings.
No one in history who avoided becoming a forced seller for emotional or financial reasons has ever regretted buying CMI at 13.4X earnings, and this time isn't likely to be the first.
Analyst Median 12-Month Price Target | Morningstar Fair Value Estimate |
| $275.38 | $231 (DCF model = 14.66 PE) |
Discount To Price Target (Not A Fair Value Estimate) | Discount To Fair Value |
| 23.15% | 8.38% |
Upside To Price Target (Not Including Dividend) | Upside To Fair Value (Not Including Dividend) |
| 30.12% | 9.15% |
12-Month Median Total Return Price (Including Dividend) | Fair Value + 12-Month Dividend |
| $281.18 | $236.80 |
Discount To Total Price Target (Not A Fair Value Estimate) | Discount To Fair Value + 12-Month Dividend |
| 24.73% | 10.63% |
Upside To Price Target (Including Dividend) | Upside To Fair Value + Dividend |
| 32.86% | 11.89% |
Analysts are extremely bullish on CMI, expecting a 33% total return in just the next year.
| 12-Month Forward S&P Bottom-Up Consensus | 5142.95 | Forward PE Forecast (12 Months From Now) | Forward Overvaluation Forecast (12 Months From Now) |
| 12-Month Consensus Market Return Potential | 12.6% | 21.58 | 28.4% |
(Source: DK S&P 500 Valuation & Total Return Tool)
In fact, they think CMI could nearly triple the market's returns over the next 12 months.
We don't actually care about 12-month price targets, which never have any basis in our recommendations.
| Time Frame (Years) | Total Returns Explained By Fundamentals/Valuations |
| 1 Day | 0.02% |
| 1 month | 0.4% |
| 3 months | 1.25% |
| 6 months | 2.5% |
| 1 | 5% |
| 2 | 16% |
| 3 | 25% |
| 4 | 33% |
| 5 | 41% |
| 6 | 49% |
| 7 | 57% |
| 8 | 66% |
| 9 | 74% |
| 10 | 82% |
| 11+ | 90% to 91% |
(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)
- over 12 months luck is 20X as powerful as fundamentals
- over 11+ years fundamentals are 11X as powerful as luck
What we care about is whether or not CMI's margin of safety compensates us sufficiently for its risk profile.
| Rating | Margin Of Safety For 11/13 SWAN Quality Companies | 2021 Price | 2022 Price | 12-Month Forward Fair Value |
| Potentially Reasonable Buy | 0% | $232.10 | $255.99 | $254.15 |
| Potentially Good Buy | 5% | $220.50 | $243.19 | $241.44 |
| Potentially Strong Buy | 15% | $197.29 | $217.59 | $216.03 |
| Potentially Very Strong Buy | 25% | $165.37 | $191.99 | $190.61 |
| Potentially Ultra-Value Buy | 35% | $150.87 | $166.39 | $165.20 |
| Currently | $210.51 | 9.30% | 17.77% | 17.17% |
Upside To Fair Value (Not Including Dividends) | 10.26% | 21.60% | 20.73% |
For anyone comfortable with its risk profile, CMI is now a potentially strong buy. And here's why.
Reason Four: Excellent Total Return Potential Both In The Medium And Long-Term
For context, here's the return potential of the 26% overvalued S&P 500.
S&P 500 2023 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
S&P 500 2026 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
Analysts expect the S&P 500 to deliver about 24% total returns over the next five years.
| Year | Upside Potential By End of That Year | Consensus CAGR Return Potential By End of That Year | Probability-Weighted Return (Annualized) | Inflation And Risk-Adjusted Expected Returns |
| 2021 | -25.47% | -94.07% | -70.55% | -73.47% |
| 2022 | -17.81% | -16.28% | -12.21% | -15.13% |
| 2023 | -8.93% | -4.35% | -3.26% | -6.18% |
| 2024 | 0.17% | 0.05% | 0.04% | -2.88% |
| 2025 | 10.04% | 2.36% | 1.77% | -1.15% |
| 2026 | 24.37% | 4.38% | 3.33% | 0.41% |
(Source: DK S&P 500 Valuation And Total Return Tool) updated weekly
Adjusted for inflation, the risk-expected returns of the S&P 500 are near zero for the next five years.
Aristocrats are expected to deliver about 2.4% yield + 8.9% growth -2.3% valuation drag = 9.0% CAGR returns over the next five years = 3.4% CAGR inflation and risk-adjusted expected return.
And here's what CMI offers right now.
- 5-year consensus return potential range: 12% to 24% CAGR
CMI 2023 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
CMI 2026 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
Over the next five years, analysts expect 24% returns from the S&P 500 and potentially 134% from CMI, 5.6X better consensus return potential.
CMI Investment Decision Score
| Ticker | cmi | DK Quality Rating | 13 | 85% | Investment Grade | A+ |
| Sector | Industrial | Safety | 5 | 85% | Investment Score | 100% |
| Industry | Machinery | Dependability | 5 | 84% | 5-Year Dividend Return | 21.67% |
| Sub-Industry | Construction Machinery & Heavy Trucks | Business Model | 3 | Today's 5+ Year Risk-Adjusted Expected Return | 13.55% | |
| Ultra SWAN, Phoenix, Top Buy, Hyper-Growth, Strong ESG | ||||||
| Goal | Scores | Scale | Interpretation | |||
| Valuation | 4 | Strong Buy | CMI's 17.72% discount to fair value earns it a 4-of-4 score for valuation timeliness | |||
| Preservation of Capital | 7 | Excellent | CMI's credit rating of A+ implies a 0.60% chance of bankruptcy risk, and earns it a 7-of-7 score for Preservation of Capital | |||
| Return of Capital | 10 | Exceptional | CMI's 21.67% vs. the S&P's 8.59% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score | |||
| Return on Capital | 10 | Exceptional | CMI's 13.55% vs. the S&P's 3.38% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score | |||
| Total Score | 31 | Max score of 31 | S&P's Score | |||
| Investment Score | 100% | Exceptional | 73/100 = C(Market Average) | |||
| Investment Letter Grade | A+ | |||||
(Source: DK Automated Investment Decision Tool)
Cummins is as close to a perfect hyper-growth Ultra SWAN investment as you can find in today's market.
CMI Total Returns Since 1986 (Annual Rebalancing)
(Source: Portfolio Visualizer)
Note how CMI and BTI have both beaten the market by a modest amount over the last 35 years.
And also note how combining these two Ultra SWANs resulted in better returns than either delivered alone.
In fact, CMI + BTI delivered more than 3X the market's inflation-adjusted returns.
Why?
Zen Phoenix: Turbocharge Your Retirement Income With Blue-Chip Yield & Growth
Combining the world's best high-yield blue-chips with the best growth blue-chips creates an unstoppable income growth machine.
(Source: Portfolio Visualizer)
- yield in 1986: 2.3% (BTI was highly overvalued)
- the yield on cost today: 59.2%
- annual income growth (courtesy of dividend reinvestment and annual rebalancing): 17.2%
- faster income growth than either BTI or CMI delivered on its own
| Investment Strategy | Yield | LT Consensus Growth | LT Consensus Total Return Potential | Long-Term Risk-Adjusted Expected Return | Long-Term Inflation And Risk-Adjusted Expected Returns |
| Safe Midstream | 6.0% | 6.2% | 12.2% | 8.5% | 6.2% |
| CMI + BTI | 5.8% | 9.8% | 15.6% | 15.6% | 13.3% |
| Safe Midstream + Growth | 3.3% | 8.5% | 11.8% | 8.3% | 5.9% |
| REITs | 3.0% | 7.0% | 9.9% | 6.9% | 4.6% |
| Cummins | 2.8% | 15.4% | 18.2% | 12.7% | 10.4% |
| High-Yield | 2.7% | 11.0% | 13.7% | 9.6% | 7.2% |
| Dividend Aristocrats | 2.4% | 8.9% | 11.3% | 7.9% | 5.6% |
| Value | 2.1% | 12.1% | 14.2% | 10.0% | 7.6% |
| 60/40 Retirement Portfolio | 1.9% | 5.1% | 7.0% | 4.9% | 2.6% |
| REITs + Growth | 1.8% | 8.9% | 10.6% | 7.4% | 5.1% |
| High-Yield + Growth | 1.7% | 11.0% | 12.7% | 8.9% | 6.5% |
| 10-Year US Treasury | 1.61% | 0.0% | 1.6% | 1.6% | -0.7% |
| S&P 500 | 1.4% | 8.5% | 9.9% | 6.9% | 4.6% |
| Nasdaq (Growth) | 0.7% | 11.0% | 11.7% | 8.2% | 5.8% |
| Chinese Tech | 0.3% | 14.0% | 14.3% | 10.0% | 7.7% |
(Source: Morningstar, FactSet Research, Ycharts)
Higher safe yield than high-yield ETFs? Yes and 3% more than Cummins alone.
Faster growth than the Nasdaq? That's what analysts expect.
Better risk-adjusted returns than virtually any other investment strategy on Wall Street? Absolutely.
This is the Zen Phoenix strategy in action.
- Zen Phoenix: always buy growth with yield and yield with growth
- always at fair value or better
- and always focusing on safety and quality first and sound risk management always
- balance in all things that matter (safety, quality, risk management, yield, growth, and value)
- the only six fundamentals you need to retire rich and stay rich in retirement.
But before you start counting your riches, don't forget to consider CMI's risk profile.
Risk Profile: Why Cummins Isn't Right For Everyone
There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
CMI Risk Profile Summary
The largest risk Cummins faces is a declining trucking environment, given the company's exposure to new truck production. The truck market is tied to consumer spending and industrial production. The trucking cycle can swing year to year from tight capacity to overcapacity based on global economic activity, leading to a pause in new truck orders. Truck operators are less likely to replace and expand their fleet when freight demand is soft. Today, freight demand is strong largely due to solid consumer goods and e-commerce demand that started to tick up in the second half of 2020, following pandemic lows in the first half of the year.
We think the impact from emissions regulation will be gradual rather than immediate, but this could accelerate faster than we expect, forcing peers to invest heavily in developing regulatory compliant products. This could lead to an environment where peers' products are on par with Cummins, leaving little differentiation between brands. The regulatory environment has pushed Cummins to start preparing for a zero-emission future today. The company has begun investing in alternative power solutions, such as BEVs and fuel cells (which utilize hydrogen as a key component). We think fuel cells will likely power long-haul vehicles, such as trucks and trains in the future. Cummins has ventured into hydrogen production and the development of fuel cell technology. This too, could draw additional market entrants, who can compete away returns from Cummins. Additionally, it's still too early to tell if the cost of producing hydrogen will be economically viable compared with diesel and natural gas.
Cummins also faces viable threats from competitors in the electrification of powertrains. The company's peers can aggressively expand investments to improve their own electric powertrain offerings, taking away market share. Moreover, competitors could pull ahead of Cummins by dominating electric motor sales, leaving little opportunity to win over customers." - Morningstar
CMI's Risk Profile Includes
- economic cyclicality
- industry disruption risk (lots of electric truck makers trying to eat CMI's lunch)
- political/regulatory risk (surrounding emissions requirements, though these have so far helped CMI) - international risk as well with 14% of sales from China
- M&A execution risk
- talent retention risk
- supply chain disruption risk (causing havoc globally right now)
- currency risk
How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk
- 4 Things You Need To Know To Profit From ESG Investing
- What Investors Need To Know About Company Long-Term Risk Management (Video)
Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.
- ESG is NOT "political or personal ethics-based investing"
- it's total long-term risk management analysis
ESG is just normal risk by another name." Simon MacMahon, head of ESG and corporate governance research, Sustainalytics" - Morningstar
ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness." - S&P
ESG is a measure of risk, not of ethics, political correctness, or personal opinion.
S&P, Fitch, Moody's, DBRS (Canadian rating agency), AMBest (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.
- credit and risk management ratings make up 38% of the DK safety and quality model
- dividend/balance sheet/risk ratings make up 79% of the DK safety and quality model
Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, Medium Risk)
(Source: Morningstar)
CMI Long-Term Risk Management Consensus
| Rating Agency | Industry Percentile | Rating Agency Classification |
| Morningstar/Sustainalytics 20 Metric Model | 97.2% | 19.4/100 Low-Risk |
| Reuters'/Refinitiv 500+ Metric Model | 87.8% | Good |
| S&P 1,000+ Metric Model | 76.0% | Good |
| Just Capital 19 Metric Model | 90.3% | Excellent |
| Consensus | 87.8% | Very Good |
| FactSet Qualitative Assessment | Average | Stable Trend |
(Sources: Morningstar, Reuters', S&P, Just Capital FactSet Research)
CMI's Long-Term Risk Management Is The 15th Best In The Master List (96th Percentile)
(Source: DK Master List) - 4 non-rated companies mean CMI is in 15th place
CMI's risk-management consensus is in the top 4% of the world's highest quality companies and similar to that of such legendary blue-chips as MSFT, TXN, VFC, MMM, BNS, NVS, ENB, ADBE, and NEE.
All companies have risks, but few on earth are better at managing theirs than CMI.
How We Monitor CMI's Risk Profile
- 25 analysts
- 2 credit rating agencies
- 6 total risk rating agencies
- 31 experts who collectively know this business better than anyone other than management
- and the bond market, the "smart money" on Wall Street
When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math retiring rich and staying rich in retirement.
Bottom Line: Cummins Is The Safest Way To Get Rich From The EV Gold Rush
The market is selling off and it's time to start getting excited.
Is the Omicron variant a threat to the economy? In the short term yes.
Is the Fed's potential accelerated taper a risk to be aware of? Sure.
Is the looming debt ceiling deadline important? Absolutely.
But guess what? Cummins has been around for 102 years and has been through a lot worse.
- a world war
- a global flu pandemic that wiped out 5% of humanity
- two depressions
- 19 recessions
- the Financial Crisis
- the COVID pandemic
- interest rates ranging from 0.5% to 16%
- inflation rates ranging from -10.3% to 15%
Do you think this A+ rated Ultra SWAN is going to get crushed by the current Wall of Worry? I sure don't.
And once we clear this current Wall of Worry, we have a $130 trillion investment opportunity for Cummins to tap into.
Remember that we have access to daily fundamental risk assessments from the bond market and the smart money on Wall Street is extremely bullish on Cummins.
So are analysts, rating agencies, and the company's exceptionally strong fundamentals.
When a company of this quality and growth potential is 17% undervalued? Then the conclusion is clear. Buy Cummins now.
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This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CMI, BTI either through stock ownership, options, or other derivatives. 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.
Dividend Kings owns CMI, and BTI in our portfolios.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.