Cummins: Diesels, Dollars, and Dividends

12/31/2015 8:00 am EST

Focus: STOCKS

John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

There have not been many new names we’ve found as new buy recommendations, but here is one—a leading global diesel engine manufacturer—suggests income expert John Dobosz, editor of Forbes Dividend Investor.

This stock has had a rough time of it in 2015, but the fundamentals make it looking extremely cheap, while the price is near long-term lows.

Columbus, Indiana-based Cummins (CMI) is a big US exporter that has been hurt by the stronger dollar and the slowdown in China.

Sales to customers in the US accounted for 52% of revenue in the past year, but other top markets include China (7%) and Brazil (4%), both of which have struggled with slowing economies.

Revenue in 2015 is expected to come in at $19.1 billion, 1% lower than in 2014, with earnings down 1% to $9.02 per share.

At 9.5 times earnings, Cummins trades at a 35% discount to its five-year average P/E ratio. It also trades 40% below its historical average multiples of sales and cash flow.

Currencies and economies are inherently cyclical, so if you can hang on for the recovery, you’ll reap the rewards. Plus, with a dividend yield of 4.6%, you get paid well to wait.

Cummins has been a habitual dividend hiker, raising the payout by a 32% annualized rate since 2010. Importantly, the annual payout of $3.90 per share is comfortably backed up by $11.07 of cash flow per share in 2015.

What’s also nice is a bit of insider buying. One of Cummins’ board members bought 1,500 shares in November at $99.52 per share.

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