Income investors seek a steady stream of dividends. 3M’s dividend history is long and it might make a great addition to an income portfolio. But the stock’s recent plunge has investors worried. Is 3M’s dividend safe? Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
3M (NYSE: MMM) is a $110 billion business based out of Minnesota. The diversified manufacturing company employs 93,000 people, and last year 3M pulled in $33 billion in sales. That breaks down to $352,000 per employee.
The company operates within the industrial sector and maintains a solid credit rating (AA-) from the S&P. This allows 3M to issue cheap debt to grow the business, and finance other initiatives. 3M is made up of five different businesses: industrial, safety and graphics, healthcare division, the electronic and energy division, and the consumer division.
3M is a prominent dividend stock because of its long history of dividend raises. They have raised their dividend 61 consecutive years making it a Dividend Aristocrat and a Dividend King. On February 5th 3M’s board of directors declared a dividend of $1.44 per share for Q1 of 2019, which is a 6% increase from 2018’s quarterly dividend. The dividend was payable March 12th to shareholders of record as of February 15th.
But 3M’s steady track record was shaken yesterday when the stock took its biggest decline in 30 years. Marketwatch reported that the company “missed profit and revenue expectations, slashed its full-year outlook, and said it was cutting 2,000 jobs.” The company is acting to reduce costs and boost cash flow.
Just a few months ago dividend investors were bullish on 3M because of its dividend hike. Now investors are not so sure. This is yet another reminder of how quickly the market can change.
10-Year Dividend History
3M paid investors $2.04 per share a decade ago. Over the last 10 years, the dividend has climbed to $5.44. That’s a 167% increase and you can see the annual changes below…
The compound annual growth rate (CAGR) is 10.3% over 10 years… but over the last year, the dividend climbed 15.7%. The increase in dividend growth is a good sign. Now, let’s take a look at the yield…
Current Yield vs. 10-Year Average
3M’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at just above 3% and that’s above the 10-year average of 2.9%. The chart below shows the dividend yield over the last 10 years…
The higher recent yield is a result of the company’s market value drop. Investors were expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 3M earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety, but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s 3M’s payout ratio based on free cash flow over the last 10 years…
The ratio is fairly steady over the last 10 years and the trend is up. The last reported year shows a payout ratio of 65.8%. Free cash flow is predicted to be $4.7 – $5.6 billion which is down from the prior $5.8 – $6.7 billion. That decrease in free cash flow could affect 3M’s dividend going forward. As of right now, it is up to 3M’s board of directors to assess the company’s financial health and adjust the dividend as they see fit. The current dividend isn’t looking as safe as it was a few years ago.
If you’re interested in seeing more dividend research, please comment below. You can also check out our free dividend DRIP calculator.