DragonImages/iStock via Getty Images

DragonImages/iStock via Getty Images

Warren Buffett is the greatest long-term investor in history and famous for several things.

Today I want to explain the three reasons why Cummins (NYSE:CMI ) is one of my favorite Buffett-style "fat pitch" blue-chip bargains.

One, I've bought several times during this correction, which has seen CMI plunge into a 30% bear market that's not justified by its exceptional fundamentals.

Why buy CMI when it's in a bear market?

Buying Cummins during bear markets can result in total returns as strong as 28% annually for the next 15 years.

CMI's average rolling return since 1986 is 15%, which is similar to the returns analysts expect in the future.

10 Year Inflation And Risk-Adjusted Return

These are potential returns on par with the greatest investors in history.

So let's take a look at the three reasons this blue-chip is likely set to soar and too cheap to ignore.

The Dividend King's overall quality scores are based on a 239 point model that includes:

credit default swap medium-term bankruptcy risk data

short and long-term bankruptcy risk

accounting and corporate fraud risk

historical cash flow growth rates

long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters'/Refinitiv and Just Capital

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 41% of the DK safety and quality model

dividend/balance sheet/risk ratings make up 82% 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 CMI score on one of the world's most comprehensive safety models?

Approximate Dividend Cut Risk In Pandemic Level Recession

5% Margin of Safety For A Potentially Good Buy

CMI: The 34th Highest Quality Master List Company (Out of 508) = 93rd Percentile

The DK 500 Master List includes the world's highest quality companies including:

All global aristocrats (such as BTI, ENB, and NVS)

All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)

CMI's 91% quality score means it's similar in quality to such blue-chips as

Even among the most elite companies on earth, CMI is higher quality than 93% of them.

Why is Cummins one of the best companies you can own?

(Sources: S&P, Moody's)

S&P and Moody's estimate a 0.63% chance that anyone buying CMI today will lose all their money in the next 30 years.

CMI's net debt is close to zero and is expected to stay that way.

CMI's debt and cash are expected to remain stable while cash flows rise at a high single/low double-digit rate.

Rising interest rates are expected to increase borrowing costs to 3% by 2024.

CMI's profitability is historically in the top 10% of peers.

Adjusting for the natural cyclicality of this industry CMI's profitability is stable or improving over the last 30 years, confirming a wide and stable moat.

CMI's margins are expected to remain stable or improve in the coming years.

CMI's growth spending is expected to grow about 8% annually through 2024 and from 2020 through 2024 the company is expected to spend a total of $22 billion on growth.

40% is the safe payout ratio in this industry according to rating agencies.

CMI's ratio became elevated due to the pandemic but is expected to fall to 33% by 2024.

$5 billion in post-dividend retained free cash flow through 2024 is enough to pay off all their debt or buy back almost 20% of its stock at current valuations.

Analysts expect $5 billion in buybacks over the next three years, which averages about 6% of the shares each year at current valuations.

We returned to $2.2 billion of cash to shareholders or 98% of operating cash flow in the form of share repurchases and dividends in 2021. In the fourth quarter, our Board of Directors authorized the repurchase of up to $2 billion in shares of common stock upon completion of the company’s 2019 $2 billion share repurchase program, reinforcing the company’s commitment to delivering strong returns to shareholders and confidence in long-term performance." - CFO, Q4 conference call

CMI's historical net buyback rate is 3% over the last decade.

At this historical rate, which analysts think could double, CMI could buy back 60% of its stock over the next three decades.

Over 75 years, how long bond investors are willing to lend to it, it could buy back 90% of its stock.

Basically, management, analysts, rating agencies, and the bond market all agree that Cummins is one of the world's best companies, its future has never looked brighter.

You might wonder how a diesel engine maker can have a bright future when the world is rapidly moving towards EVs.

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

Because Cummins is an industry leader in transitioning industrial equipment towards a clean energy future.

The decarbonization of our economy is critical to our way of life and our industry and – excuse me, and all of us and it will – and our industry will play a key role in the effort to decarbonize our economy.

Fortunately, decarbonization is also a growth opportunity for Cummins. We are confident in our ability to play a leading role in bringing lower carbon technologies to the commercial and industrial markets globally and to generate strong returns due to the unique capabilities that Cummins has built over many years. Specifically, we are a leader in key technologies for zero tail pipe emissions in commercial and industrial applications and are investing further to strengthen our position. We are also a leader in the transition technologies that will be needed in our industry for many, many years. Technologies at lower carbon emissions, while still offering customers economic solutions and hard-to-abate applications." - CEO, Q4 conference call (emphasis added)

Cummins recently bought Meritor for $3.7 billion.

Meritor is an industry leader, and the addition of their complementary strengths will help us address one of the most critical technology challenges of our age – developing economically viable zero-carbon solutions,” Cummins Chairman and CEO Tom Linebarger said in a statement. “Climate change is the existential crisis of our time and this acquisition accelerates our ability to address it.” - Forbes

Meritor has $3.9 billion in sales.

Meritor will help CMI with its goals of transitioning to an EV and hydrogen future.

CMI's long-term growth thesis is NOT about diesel engines, but zero-emissions powertrains for trucks, buses, trains, and construction equipment.

CMI has been gaining market share and growing sales by 6.3% CAGR for 20 years, thanks to its R&D efficiency and industry-leading ability to offer emission reduction technology.

CMI has been cutting emissions for decades while winning market and achieving returns on capital in the top 25% of peers.

Over the last decade, CMI has averaged a 5% cash return yield to investors.

CMI has invested $900 million so far into zero-emission technology and has been lavishing investors with dividends and buybacks while still investing prudently into growing its business.

By 2030 8% to 18% of trucks are expected to be ZEV, depending on the type.

And in the rapid adoption forecasts, it's 12% to 34%.

CMI believes it can grow sales to $43.5 billion by 2030.

CMI is a trusted supplier for the world's largest heavy vehicle makers.

CMI's installed base is 12 million engines, growing rapidly over time, resulting in steady growth in its aftermarket parts business.

CMI believes ZEV can double its addressable market to $100 billion per year.

When it comes to ZEV trucks the world's largest companies turn to Cummins.

CMI already has already delivered over 500 electric buses and over 2000 hydrogen fuel cell delivery trucks.

CMI's hydrogen partners include NextEra Energy (NEE), Air Products & Chemicals (APD), and Air Liquide.

What does this mean for CMI in terms of medium-term and long-term growth potential?

(Source: FAST Graphs, FactSet Research Terminal)

The bond market expects a mild recession in 2024, but CMI's dividends are expected to keep growing at a modest pace, and it's expected to achieve an 18-year dividend growth streak in 2024.

How accurate are analysts are forecasting this company's earnings growth?

CMI's historical growth rates are -1% to 35% CAGR depending on the time frame.

CMI is expected to grow at historical rates, and it has the secular growth trends to accomplish this.

OK, so now we see why CMI has incredible quality, and great growth potential, so let's look at the final reason to potentially be greedy when others are fearful on Cummins.

For 20 years hundreds of millions of investors have paid 14 to 15X earnings for CMI outside of bear markets and bubbles.

Upside To Fair Value (NOT Including Dividends)

My conservative fair value estimate for CMI is 14X earnings and today it trades at just 11.3!

No long-term investor in history, who avoided becoming a forced seller for emotional or financial reasons has ever regretted buying CMI at 11.3X earnings or 8.3X EV/EBITDA.

And the best available facts say today is 80% likely to not be the first time.

And I'm hardly the only one bullish on Cummins.

Analyst Median 12-Month Price Target

Discount To Price Target (Not A Fair Value Estimate)

Upside To Price Target (Not Including Dividend)

Upside To Fair Value (Not Including Dividend)

12-Month Median Total Return Price (Including Dividend)

Discount To Total Price Target (Not A Fair Value Estimate)

Discount To Fair Value + 12-Month Dividend

Upside To Price Target ( Including Dividend)

Upside To Fair Value + Dividend

Morningstar thinks CMI has 20% upside to fair value.

Analysts expect CMI to deliver 32% total returns in the next year alone.

For anyone comfortable with its risk profile, CMI is a potentially strong buy, and here's why.

For context, the S&P 500 is about 16% historically overvalued according to JPMorgan.

(Source: DK S&P 500 Valuation And Total Return Tool)

Stocks have already priced in 94% EPS growth from 2020 through 2024 and are trading at 18.5X forward earnings.

S&P 2027 Consensus Return Potential

Inflation And Risk-Adjusted Expected Returns

(Source: DK S&P 500 Valuation And Total Return Tool)

For context, analysts think that CMI will deliver in a single year returns nearly as good as the market will over the next half-decade!

CMI 2027 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

(Source: FAST Graphs, FactSet Research)

If CMI grows as expected and returns to historical mid-range fair value

Dividend Kings Automated Investment Decision Tool

Dividend Kings Automated Investment Decision Tool

CMI isn't just a potentially strong buy, it's as close to a perfect dividend growth blue-chip opportunity as exists on Wall Street today.

But just remember that even low-risk Ultra SWANs still have their share of risks to consider before investing.

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

Global supply constraints continue to limit growth for our industry in the fourth quarter, resulting in elevated freight and logistic costs and drove inefficiencies in our operations negatively impacting margins. We have been experiencing supply-side challenges all year and saw a further escalation in global freight rates in the fourth quarter." - CFO Q4 confrence call

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.

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.

Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, Medium Risk)

(Sources: Morningstar, Reuters', S&P, JustCapital, FactSet Research)

CMI's risk-management consensus is in the top 12% of the world's highest quality companies and similar to that of such other companies as

The bottom line is that all companies have risks, but CMI is very good at managing theirs.

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.

The S&P is up 9% in three days, and it feels like the market might have bottomed.

Or this might simply be a sucker rally during a bear market (the bond market's opinion).

I am not a market timer, just a disciplined financial scientist. So here's what I can tell you.

Reasons To Potentially Buy CMI

When it comes to yield, value, and growth, Cummins has all three in spades.

So no matter what happens with the economy or stock market in the next few years, there is one simple conclusion I can draw today.

Cummins is one of the best Buffett-style blue-chip "fat pitch" bargains on Wall Street. And anyone buying this world-class company today is likely to feel like a stock market genius in 5+ years.

Except, it's not luck, or magic we're counting on, just one of the world's best blue-chips trading at absurd private equity valuations.

Dividend Kings helps you determine the best safe dividend stocks to buy via our Automated Investment Decision Tool, Research Terminal, Phoenix Watchlist, Company Screener, and Daily Blue-Chip Deal Videos.

Click here for a two-week free trial so we can help you achieve better long-term total returns and your financial dreams.

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.

Disclosure: I/we have a beneficial long position in the shares of CMI 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.

Additional disclosure: Dividend Kings owns CMI in our portfolios.