Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we’re going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn’t to say that these stocks don’t share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week’s selection.
This week, we’ll turn our attention to a company that literally keeps America trucking, Cummins Inc. (NYSE:CMI) , and I’ll show you why it and its dividend could drive your portfolio to big gains.
Cummins Inc. (NYSE:CMI), a manufacturer of diesel and natural gas engines, as well as a provider of engine components and power generation products, has soared some 500% since its recession lows. The most amazing aspect about this heavy-duty engine maker is that it could still have plenty of room to run higher.
Could Cummins run out of gas?
The downside to Cummins Inc. (NYSE:CMI)’ business is that many of the factors that can affect its demand are well beyond its control. Low natural gas prices, for instance, help push trucking companies and government agencies to switch their existing gasoline and diesel engine fleets over to cleaner burning natural gas engines. In fact, the joint venture between Cummins and Westport Innovations Inc. (NASDAQ:WPRT) is built upon getting heavy-duty fleets to make this change. However, with natural gas prices having doubled over the past year from $2/mbtu to more than $4/mbtu, it threatens to close the price gap advantage that natural gas held over traditional fuels and could slow demand for this joint venture.
Another factor that Cummins Inc. (NYSE:CMI) needs to keep in context is the overall health of the economy. Trucking companies are unlikely to upgrade to a newer fleet if the economy is stagnant or if the fuel savings impetus isn’t there for them. Similarly, Cummins could struggle over the coming years as the U.S. government pares back its spending to curb what had been a precipitously growing federal budget deficit.
Keep on trucking
Luckily for Cummins Inc. (NYSE:CMI), there are a number of catalysts currently in place that will more than cancel out the effects of the sequester and worries about rising natural gas prices.
For one, the impetus for trucking companies to purchase newer tractors fitted with Cummins diesel engines or its liquefied natural gas-powered engines is greater than ever. The initial investment of purchasing newer tractors is certainly costly for shippers, but the benefits in terms of fuel cost savings from newer technology is well worth it. One company that’s begun diving on board is logistics juggernaut United Parcel Service, Inc. (NYSE:UPS) . UPS is planning to boost its LNG-powered fleet to approximately 800 trucks from the current 112 by the end of 2014. LNG fuel is cheaper relative to diesel, and is cleaner burning which helps these vehicles pass their emissions testing.
Another catalyst is the simple fact that one of its primary competitors is faltering badly. Engine maker Navistar International Corp (NYSE:NAV) is an absolute mess, announcing a probe by the Securities and Exchange Commission last year and the need to purchase engine technology from Cummins because it’s components met the Environmental Protection Agency’s clean air standards and Navistar International Corp (NYSE:NAV)’s did not.
I also feel you can’t overlook the role that emerging markets are going to play in Cummins Inc. (NYSE:CMI)’ long-term growth prospects. Many emerging markets are relying on oil or metal mining income to fuel their GDP growth and Cummins helps to power many of the machines used in mining activities. While metal prices and oil prices haven’t exactly cooperated recently, these are finite resources that will only grow in importance as time wears on.