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Value Series II: Cummins Inc Employees Can Use the P/CF Ratio to Find Value

For Cummins Inc employees building a Retirement strategy, focusing on undervalued stocks with a high Price-to-Cash Flow ratio can be a useful tool to improve portfolio performance and plan for the future, 'says [Advisor Name], a representative of The Retirement Group, a division of Wealth Enhancement Group.

'As market volatility continues to mount, Cummins Inc employees should look for investment strategies that reward cash flow more than traditional earnings to help them achieve their long-term Retirement goals,' says [Advisor Name], a representative of The Retirement Group, a division of Wealth Enhancement Group.

In this article we will discuss:

1. Importance of Price-to-Cash Flow ratio in the evaluation of investment opportunities.

2. Long-term returns how value investing outperformed glamour investing.

3. Role of Price to Cash Flow ratio in retirement planning for Cummins Inc employees & retirees.

Given current market volatility, we think now is a good time to revisit important value metrics with Cummins Inc employees and retirees in our four-part series. Part two of this four part value series will examine the Price-to-Cash Flow ratio. But sometimes investors want to beat the market. Those investors should consider the following proven strategy that some great investors have used.

Value investors learned how to beat the average annualized returns of the S&P 500 decades ago - and many have decades of track record to prove it. The most famous value investor is obviously Warren Buffett, but so are Benjamin Graham, David Dodd, Charlie Munger, Christopher Browne and Seth Klarman. This style invests in four metrics that define a value investment. These are the Price-to-Earnings Ratio, Price-to-Cash Flow Ratio, High Dividend Yield and Price-to-Book Ratio. These metrics are strong indicators of undervalued security, as you will see. These cheap Cummins Inc securities regularly beat the market. How they affect investing depends on some characteristics and how their investment returns are correlated.

Today we examine the Price-to-Cash Flow ratio (P/CF) as a tool for planning for the retirements of Cummins Inc employees. Many feel that using cash flow rather than accounting earnings paints a more complete picture of a company's business performance that may help with investment decisions and investment performance. We understand researched solutions are important to Cummins Inc employees. Below are the results of two Fama and French [1] backtests of cash flow yield (the inverse of P/CF ratio) data from 1951 to 2013. As of December 2013, the sample had 2,526 firms (Carlisle-PCF, P2). The value decile had the 269 stocks with the highest cash flow yield and the glamour decile had the 311 with the lowest cash flow yield. The glamour stocks average USD 4.74 billion in size and stocks are worth USD 4.80 billion. (The average is skewed by the largest companies. In context, the smallest company is worth USD 272 million today (much smaller than average but still investable for most investors).

Stocks having negative cash flow were excluded. Portfolios are formed June 30 and rebalanced annually. In this backtest, the two portfolios are weighted by market capitalization, so bigger firms drive the portfolio performance more and smaller firms less. Here the value decile has returned 16.7 percent compound (18.6 percent in the average year) versus 9.3 percent for the glamour decile (11.5 percent in the average year) (Carlisle-PCF, P3) This is because the value portfolios generated more cash flow per dollar invested compared to the glamour decile. 27.2 percent versus 4.3 percent for the glamour portfolio (Carlisle-PCF, P5). I used a rolling average. The 'average' I've quoted is for the full period. The rolling average is higher but never lower. The rolling average is the annualized mean return for each year-long period (sometimes called a 5-year rolling return) As we noted above, value's outperformance over glamour is not a historical anomaly.

Taking just the period from 1999 we see that even though the return is lower than the long-term average, value has remained the better bet. Since 1999, value outperformed glamour 8.7 percent compounded and 6.2 percent in the average year (Carlisle-PCF, P7) Possibly the popularity of simple value strategies has contributed to lower returns recently. I think it's because the market is still working off the massive overvaluation of the late 1990s Dot Com boom. We think a value-based strategy is best for Cummins Inc employees and retirees Market capitalization-weighted returns can be used to show that the outperformance of value over glamour is not due to value portfolios with smaller stocks. They mean absolutely nothing unless you're running an index or hugging an index. It is easiest to just weight all positions equally in a portfolio. (If we are prepared to take a little more volatility in exchange for a little extra return, we can also Kelly weight [2] our best ideas). Kelly Weighting is based on the Kelly Criterion - a formula for determining what percentage of capital should be invested in each trade to achieve maximum long-term growth.

There are two parts to the formula (Kelly% = W-[(1 - W)/R]: the winning probability factor W and the win/loss ratio R. It is a winning probability that the probability trade will result in a positive return. The win/loss ratio is the sum of the positive trade amounts minus the negative trading amounts. Its result will tell investors what percentage of their total capital they should invest in each investment. Equal weight return statistics for cash flow yield are given below. The value returned 20.7 percent compounded (23.8 percent on average) against glamour's 9.3 percent compounded return (12.5% on average) in the equal weight backtests (Carlisle-PCF, P9).

And you might notice that there is a tiny advantage for the cash flow yield's value decile over the earnings yield's value decile: 20.7 percent to 20.1 percent. We'll examine the impact of that small cash flow win in coming weeks. Again the value portfolios generate more cash flow than the glamour portfolios - 24.6 percent versus 4.1 percent in the glamour portfolios. We saw last week that the average cash flow yield of the equally weighted value portfolio is a bit lower than that of the market capitalization-weighted portfolios.

This means that over the whole period, bigger stocks were generally cheaper than smaller stocks to buy cash flow. Not always, of course, but it is interesting nonetheless. In equal-weight portfolios, value has beaten glamour since 1999 by 11.1 percent compounded and 10.0 percent in the average year. Since the value portfolios generate more cash flow than the glamour portfolios (on average 24.6 percent versus 4.1 percent in the glamour portfolios) we value research just as much as Cummins Inc employees and retirees do (Carlisle-PCF, P10). We saw last week that the average cash flow yield of the equally weighted value portfolio is a bit lower than that of the market capitalization-weighted portfolios.

This means that over the whole period, bigger stocks were generally cheaper than smaller stocks to buy cash flow. Not always, of course, but it is interesting nonetheless. In the equal-weight portfolios, value has outperformed glamour Since 1999 by 11.1 percent compounded and 10.0 percent in the average year (Another study analyzing the P/CF metric is listed below. Brandes study In a Brandes Research Institute Study, exhibit 6 shows global all-cap results across three price metrics. They confirmed a consistent premium across all metrics. Focus is on P/CF ratio and outperformance in decile 10 value stocks. The smallest outperformance between decile 1 glamour stocks and decile 10 value stocks is seen in P/B measurement, where the average outperformance was 7.1% (Brandes, p. 8) In the same Brandes study they tracked Price-to-Cash Flow in the U.S., Non-U.S. and Emerging Markets. In rolling 5 year annualized returns of price-to-cash flow deciles for 1980-2014, the lower price-to-cash flow deciles outperform the higher Price - to-Cash flow deciles.

Results are shown on the graph 'Appendix C: Figure 4' Using P/CF Deciles Findings by Regions. ' Even though all of the lowest Price-to-Cash Flow deciles outperform the high Price-to-Cash Flow deciles, the biggest premiums occur outside of the United States. Actually, the biggest premium is found in emerging markets where companies that generate more cash are better positioned to weather market downturns. This highlights how useful P / CF ratio analysis can be in planning for Cummins Inc employees' and retirees' retirements Currently the average Price-to-Cash Flow (P / CF) for the stocks in the S&P 500 is 13.9.

But like the P/E ratio, any value below 15 to 20 is generally good. A study from Zach's confirms this. According to their testing, a P/CF of 0-10 delivered the best result (17.1% in 10 years). The second best was 10-20, up 10.2%. But at + 30, the odds are stacked against a loss (-2.8%). And over 40, the odds are even greater - -6.9%. You can see that low-price-to-cash-flow stocks outperform high-price-to-cash-flow stocks The Retirement group is a national group of financial advisors. We only plan for and design retirement portfolios for transitioning corporate employees.

And each representative of The Group has been hand picked by the Retirement Group in select cities throughout The United States. Each advisor was screened for pension expertise, financial planning experience and portfolio construction knowledge. TRG believes in teamwork to find solutions to our clients' problems. A conservative investment philosophy guides the team in constructing client portfolios with laddered bonds / CDs / mutual funds / ETFs / Annuities / Stocks and other investments. They handle Retirement / Pensions / Tax / Asset Allocation / Estate / Elder Care issues. This document uses different research tools and techniques. All attempts to estimate future results involve assumptions and judgments and are therefore only tentative estimates.

The law, investment climate, interest rates and personal circumstances will all change and will affect how accurate our estimations are and how appropriate our recommendations are. Such a plan requires ongoing change sensitivities as well as constant re-examination and alteration of the plan. So update your plan a few months before your expected retirement date and do an annual review. Nothing contained herein shall be construed as an attempt by the Retirement Group, LLC or any of its employees to practice law or accounting. We look forward to speaking with any tax and/or legal professionals you may select regarding the implications of our recommendations. Through your retirement years we will continue to update you on issues affecting your retirement via our complimentary and proprietary newsletters, workshops and periodic updates. Or call us at (800) 900-5867.

Articles you may find interesting:

Sources:

1. 'Layoffs and Job Cuts News - 2024.' The Layoff , 2024, www.thelayoff.com

2. .'Cognizant Technology Solutions Restructuring and Layoff Updates. ' The Layoff , 2024, www.thelayoff.com .

3. 'Cognizant Technology Solutions Pension Plan and 401(k) Details. ' Investopedia , 2024, www.investopedia.com .

4. 'Stock Options and RSU Details for Cognizant Technology Solutions. 5. ' Forbes , 2024, www.forbes.com .

5. 'Cognizant Technology Solutions Employee Stock Options and RSU Guide.' Business Insider , 2024, www.businessinsider.com .

How does Cummins determine eligibility for participation in the Cummins Pension Plan, and what are the implications for employees who temporarily leave the workforce? This inquiry should delve into the specific criteria that define an eligible employee, such as citizenship requirements and exclusions, as well as the continuation of benefits and service credit during approved leaves or breaks in service at Cummins. It would also explore the complexities surrounding vesting and how service prior to a break is credited upon re-employment at Cummins.

Eligibility and Participation in the Cummins Pension Plan: Eligibility for the Cummins Pension Plan requires being an active employee, not participating in another Cummins defined benefit pension plan, and meeting certain citizenship or residency criteria. During approved leaves of absence, employees continue to accrue service credits, ensuring continuous growth in their pension benefits. Notably, vesting occurs after three years of service, securing the employee's entitlement to pension benefits upon leaving the company. The plan handles breaks in service by allowing reemployment within 12 months to count towards vesting and benefit calculations, safeguarding employee benefits against temporary disruptions in their career with Cummins.

What are the potential benefits and limitations of the forms of distribution available under the Cummins Pension Plan, and how should employees prepare for their pension benefit election? This question requires an analysis of various forms of distributions, such as lump sums versus annuities, highlighting the financial implications of each choice, particularly in relation to the IRS rules for 2024 regarding tax treatment. Employees should also consider how their family structure (e.g., marital status, dependents) may influence their decisions when electing a distribution method.

Distribution Forms and Tax Considerations: The Cummins Pension Plan offers various distribution forms, including lump sums and annuities, each with distinct tax implications under IRS rules for 2024. Employees must consider their family structure and tax status when choosing a distribution form, as these factors influence the tax treatment and financial outcome of their pension benefits. The plan provides clear guidelines on these options, ensuring employees can make informed decisions that align with their personal and financial circumstances.

In what ways do pay credits and interest credits accrue within the Cummins Pension Plan, and how can employees gauge their potential retirement benefits over time? This question will focus on the specifics of how pay credits are calculated based on an employee's compensation and service at Cummins, as well as the impact of interest credits on the total account balance and long-term retirement planning. It will also examine how employees can track these credits through the Cummins retirement resources.

Accrual of Pay and Interest Credits: The pension benefits at Cummins accrue through pay credits based on compensation and service, along with interest credits. Employees can monitor their accumulating benefits through the Cummins retirement resources, offering transparency and planning advantages. This structured accrual method supports employees in projecting their future pension benefits and making informed decisions about their retirement timing and financial needs.

How does Cummins ensure compliance with ERISA and other regulatory standards in the management of the Cummins Pension Plan, and what rights do employees have under these regulations? This query should explore Cummins' obligations as a fiduciary in managing employee benefits and highlight the key rights of plan participants. The discussion should include access to plan documents, the process for filing claims, and the significance of ERISA protections for employees retired from Cummins.

Regulatory Compliance and Employee Rights: Cummins diligently adheres to ERISA standards in managing the pension plan, emphasizing fiduciary responsibility and ensuring participants' rights are upheld. Employees have rights to access plan documents, participate in claims and appeals processes, and are protected under ERISA from any plan-related discrimination. This regulatory compliance not only secures the integrity of their pension benefits but also reinforces the legal framework protecting participant rights.

What role does the Pension Benefit Guaranty Corporation (PBGC) play in safeguarding the retirement benefits of Cummins employees, and how does this affect the perception of the plan's reliability? This question would examine the insurance coverage provided by the PBGC, what types of benefits are guaranteed, and under what circumstances benefits may not be fully covered. Employees might analyze how this federal insurance impacts their confidence in the plan, especially in light of changing economic conditions.

Role of the Pension Benefit Guaranty Corporation (PBGC): The PBGC insures the pension benefits under the Cummins Plan, providing a safety net that enhances the reliability of these benefits. Employees covered by the plan can gain confidence in the security of their pensions, knowing that even in the face of potential plan termination, the PBGC guarantees the core benefits, subject to certain legal limits and conditions.

How does the Cummins Pension Plan interface with employees' Social Security benefits, and what should retirees consider when planning for a sustainable retirement income? This inquiry will look at the coordination of benefits under the Cummins plan with Social Security, examining how pension income might influence Social Security calculations. It would require discussions on the timing of retirement elections and how they align with Social Security claims.

Interaction with Social Security Benefits: The Cummins Pension Plan is designed to integrate smoothly with Social Security benefits, offering provisions that help plan participants optimize their total retirement income. Understanding this interaction allows employees to strategically plan their retirement age and benefit commencement, maximizing their financial stability in later life.

What are the specific procedures and deadlines that Cummins employees should follow to successfully elect a distribution from the Cummins Pension Plan upon retirement? This question will necessitate a detailed look at the steps involved in initiating a benefit distribution, including the importance of spousal consent, the timing of application submissions, and any documentation that may be required. Understanding these processes can significantly affect the financial outcomes for retirees.

Procedures and Deadlines for Electing Pension Distribution: The Cummins Pension Plan outlines specific procedures and deadlines for electing a distribution upon retirement, emphasizing the importance of timely and informed decision-making. By understanding these processes, employees can avoid delays and ensure that they receive their pension benefits in the manner that best suits their post-retirement financial plans.

What are the implications of choosing to defer pension benefits and how does the Cummins Plan accommodate employees who opt not to start their benefits at the normal retirement date? This inquiry could address the potential financial consequences of deferring benefits, including eligibility requirements for such deferral and how it aligns with IRS regulations. Employees should critically evaluate their financial situations and retirement goals, weighing the allure of continued employment against starting their retirement benefits sooner.

Deferring Pension Benefits: Employees at Cummins have the option to defer their pension benefits beyond the normal retirement date, which can influence the financial value of their benefits. The plan provides guidelines on how deferral impacts benefit calculations and distributions, assisting employees in making decisions that align with their long-term financial goals.

How can Cummins employees designating beneficiaries ensure that their wishes are respected concerning death benefits, particularly in light of recent changes in the pension landscape? This question focuses on the options available to employees for designating beneficiaries, the process for updating these designations over time, and the specific forms that need to be completed to ensure compliance with the Cummins Pension Plan. It will also discuss the impact of state and federal laws on these designations.

Designating Beneficiaries and Ensuring Compliance: The plan stipulates clear processes for designating beneficiaries for pension benefits, ensuring that employees' wishes are respected and legally documented. This is crucial for planning and securing financial provisions for survivors, reflecting the plan's comprehensive approach to retirement benefits.

How can Cummins employees contact the Cummins Retirement Benefits Service Center to obtain more information about the Cummins Pension Plan and related retirement processes? This question emphasizes the various channels through which employees can reach out to the service center, the types of queries they can address regarding the Cummins Pension Plan, and the resources available online to assist with pension-related inquiries. Employees are encouraged to take advantage of these resources to make informed decisions regarding their retirement planning.

Accessing Information and Assistance: Cummins provides multiple channels for employees to access information and assistance regarding their pension plan, including online resources and a dedicated service center. This accessibility ensures that employees can obtain detailed information and personalized support, enabling them to navigate their pension benefits effectively.