New Buy CMI

16 Dec 2015 23:26

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The big headline in news for 2015 was the dramatic drop in oil. Not a single oil producer has been spared and all have seen a significant drop in their share price. Another area that has been quietly getting whittled down and not getting as much attention (I argue it should) has been U.S. Industrials. U.S. Industrials have seen downward pressure on their share prices due to a slow down in China's economy and a strong U.S. dollar.

Cummins (CMI) however falls a bit into both camps and its share price has been hammered over the year dropping from a high of $145 down to the current price of $87. That is a 40% year to date drop!

An economic slowdown will without a doubt hurt CMI's 2016 sales and earnings. Analysts 2016 earning range from a 5% to 12% decrease in earnings. The forecasted decrease in earnings will change their dividend payout ratio from 33% to 47% which is still pretty respectable. Additionally, CMI is not sitting on their laurels. They already have a cost reduction plan in place to address the reduction and I'd expect no less from a company that has aggressively managed their financials over the last decade.

CMI's 40% price drop has driven its dividend yield to over 4%. I do not see this as a value trap but more of an oversold position. CMI is not a one trick pony, they have a diversified business and their diesel engines can be found in construction equipment, on highway vehicles (like Dodge trucks), military vehicles, trains, marine vehicles, and power generation equipment. CMI is also involved with emissions control and natural gas engines both of which have promising growth markets. Finally do not forget the aftermarket spares business to support all those engines!

With CMI's share price near its 52 week low I pulled the trigger and bought 11 shares at $86.86/share. This purchase will net me an additional $42.90 a year in income. I'm sacrificing short term dividend growth in exchange for a high yield and the promise of dividend growing at an accelerated rate down the road (2017 and beyond). It was hard to let CMI slip by at these prices for such a well run company, if the market continues to punish them I may just have to buy more.

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