Will Cummins Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

The business of engine manufacturing may seem like a boring industry with well-established manufacturing guidelines. Yet for Cummins (NYS: CMI) , making engines is all about being on the cutting edge of innovation, as it seeks to incorporate energy-saving technologies and take advantage of partnerships to bring entirely new products to market. Can Cummins keep driving its market forward? Below, we'll revisit how Cummins does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.


Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Cummins.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$20.7 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

2.01

Fail

 

Worst loss in past five years no greater than 20%

(57.4%)

Fail

Valuation

Normalized P/E < 18

14.28

Pass

Dividends

Current yield > 2%

1.8%

Fail

 

5-year dividend growth > 10%

33.9%

Pass

 

Streak of dividend increases >= 10 years

7 years

Fail

 

Payout ratio < 75%

17.7%

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Cummins last year, it has held onto its six-point score. But the stock has done reasonably well, rising about 20% over the past year.

Cummins has a very profitable business making conventional engines. Recently, in fact, it even made a deal with competitor Navistar (NYS: NAV) to provide engines for Navistar's heavy-truck line, after Navistar's in-house engines failed to meet EPA standards.

But with the discovery of massive amounts of natural gas and a corresponding plunge in prices, Cummins has invested a lot of time and money toward the prospect of natural-gas powered heavy-duty commercial vehicles. Through a partnership with Westport Innovations (NAS: WPRT) , Cummins expects to make an 11.9-liter engine available for use by mid-2013. That should time well with plans to have a network of natural-gas fueling stations available, with Clean Energy Fuels (NAS: CLNE) working with General Electric (NYS: GE) to ready its network of more than 100 stations that can serve the heavy-duty truck market.

Cummins isn't relying on its Westport partnership to keep innovating. It also said earlier this year that it would develop its own 15-liter natural-gas heavy-duty engine, taking gas power to the next level.

For retirees and other conservative investors, Cummins' yield of nearly 2% isn't the highest in the world, but a combination of strong growth prospects and consistent payout increases makes the stock attractive. For those willing to take risk in their portfolio, Cummins is a solid prospect for retirement investors.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Find out more about Cummins and its partnership with Westport Innovations as both try to lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The Motley Fool has just released a brand-new premium report on Westport that breaks down the company's opportunities, competitive advantages, and risks, reflecting at length on its changing relationship with Cummins. To get started, simply click here now for instant access.

Add Cummins to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Cummins Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels, Cummins, General Electric, and Westport Innovations. Motley Fool newsletter services recommend Clean Energy Fuels, Cummins, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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