Updated on February 18th, 2022 by Kay Ng
The best dividend growth stocks have the ability to maintain long records of steady annual increases in their dividend payouts. This is why we focus on the Dividend Aristocrats, a group of 66 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
You can see a full downloadable spreadsheet of all 66 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:
Once per year, we review each of the Dividend Aristocrats. The next stock in the series is industrial manufacturer 3M Company (MMM). 3M has a very impressive track record. It has paid dividends for over 100 years, and it has raised its dividend for over 60 years in a row.
This makes 3M a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases. There are only 39 Dividend Kings, including 3M.
3M is facing a number of uncertainties, including litigation headwinds, and global supply chain disruptions and logistics challenges. As well, the remnant effects of the coronavirus pandemic can continue to weigh on major industrial manufacturers.
3M’s history goes all the way back to 1902, when it was a small mining venture. 3M was originally known as Minnesota Mining and Manufacturing.
Its founders started out with a very simple goal: to harvest corundum from a mine called Crystal Bay. There wasn’t much corundum to be mined, but over the next 114 years, 3M grew into one of the biggest industrial conglomerates in the world.
Today, 3M is a large diversified global manufacturer. It manufactures ~60,000 products, which are sold in ~200 countries around the world. 3M came to dominate the industrial manufacturing industry through a sharp focus on the most attractive market segments.
It has invested heavily across its core areas of focus to build a product portfolio that leads the pack. 3M is comprised of four divisions. The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software, as well as personal protective gear and security products. The Healthcare segment supplies medical and surgical products, as well as drug delivery systems.
Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. The Consumer division sells office supplies, home improvement products, protective materials and stationery supplies.
3M trades with a market capitalization of $85 billion, making it a large-cap stock. 3M released fourth-quarter and full-year earnings results on 1/25/2022. Revenue grew 0.3% to $8.6 billion for the fourth quarter. Diluted earnings–per–share fell 4.1% to $2.31.
The full-year results provide a bigger picture. Revenue grew 9.9% to $35.4 billion. Adjusted EPS climbed 14.4% to $10.12, supported by organic local–currency growth of 8.8% for the full year.
Source: Investor Presentation
Every business within 3M performed better year-over-year for the full year.
Leading the way was the Consumer segment, which grew 9.3% organically versus full-year 2020. In Q4, this segment benefited from office and stationery, consumer health and safety, and home improvement.
Transportation & Electronics revenue grew 9.0% organically in 2021 versus 2020. In Q4, organic growth in commercial solutions and advanced materials was offset by organic sale declines in electronics and auto OEM (because of the continued impact of semiconductor constraints) and transportation safety.
Healthcare revenue grew 8.6% organically in 2021. In Q4, organic growth was led by separation and purification sciences, food safety, health information systems, oral care, which was partially offset by medical solutions declines due to lower year-over-year disposable respirator sales.
Safety & Industrial grew 7.8% organically for the year. In Q4, Organic growth in this segment was led by strength in closure and masking systems, abrasives, industrial adhesives and tapes and electrical markets. However, these were more than offset by personal safety declines due to strong COVID-related respiratory demand in Q4 2020.
3M expects adjusted EPS of $10.15 to $10.65 and organic sales growth of 2% to 5% for 2022.
3M has struggled to generate growth over the past few years. Still, 3M maintains a promising long-term outlook. We believe the company is capable of growing adjusted earnings-per-share by 5% per year over the next five years.
While the international markets are in decline at the moment, this is likely to be a short-term challenge. The long-term prospects for the emerging markets remain highly attractive, due to the relatively high economic growth rates in the under-developed regions of the world.
3M is still generating meaningful growth in health care and consumer products, two of its core business segments. Acquisitions are likely to add to its growth, especially in health care, such as the nearly $7-billion acquisition of Acelity.
Source: Investor Presentation
Acelity is a leading global medical technology company that manufactures wound care and specialty surgical products under the KCI brand.
Health care is a growth industry, and the acquisition only further bolsters 3M’s already-strong presence in health care.
Competitive Advantages & Recession Performance
To raise dividends for over 60 years requires multiple durable competitive advantages. For 3M, technology and intellectual property are its biggest competitive advantages.
3M has over 40 technology platforms and a team of scientists dedicated to fueling innovation. Innovation has provided 3M with over 100,000 patents obtained throughout its history, which helps fend off competitive threats.
3M continues to invest heavily in research and development. The company aims to spend ~6% of annual sales on R&D. The company’s recent R&D investments are:
- 2017 research-and-development expense of $1.9 billion
- 2018 research-and-development expense of $1.8 billion
- 2019 research-and-development expense of $1.9 billion
- 2020 research-and-development expense of $1.9 billion
- 2021 research-and-development expense of $2.0 billion
3M R&D is so successful in creating new products that approximately 30% of annual sales came from products that didn’t exist five years ago. 3M has established itself as an industry leader, across its product segments. Their competitive advantages also help 3M remain profitable, even during recessions.
3M’s earnings-per-share during the Great Recession are below:
- 2007 Earnings-per-share of $5.60
- 2008 Earnings-per-share of $4.89 (13% decline)
- 2009 Earnings-per-share of $4.52 (7.5% decline)
- 2010 Earnings-per-share of $5.75 (27% increase)
The company is not immune from recessions, and its earnings-per-share fell in 2008 and 2009. However, it bounced back in 2010. And, it remained steadily profitable throughout the recession, which allowed it to continue raising its dividend.
Indeed, 3M has a highly secure dividend payout. Based on management’s guidance, 3M is likely to have a dividend payout ratio of roughly 57% for 2022.
Valuation & Expected Returns
Based on expected adjusted earnings-per-share of ~$10.40 for 2022, 3M stock has a price-to-earnings ratio of 14.3. This is lower than its average valuation. Our estimate of fair value is a price-to-earnings ratio of 19, which is roughly in line with its 10-year historical average.
This makes the stock undervalued. Shareholders would see total annual returns improved by ~6.1% per year if the stock reverted to its average valuation by 2027.
Owners of 3M stock should also see returns from earnings growth and dividends. 3M has experienced earnings-per-share growth of 6%-7% over the last decade. We estimate the company will generate ~5% annual EPS growth over the next five years. Lastly, the stock has a 4% dividend yield.
A breakdown of potential returns through 2024 is as follows:
- 5.0% EPS growth
- 6.1% multiple expansion
- 4.0% dividend yield
This results in total expected returns of ~15.1% through 2026. This is a decent expected rate of return, resulting in a buy recommendation at this time.
3M remains a high-quality business and is likely to continue raising its dividend each year. There are very few companies that can match the company’s history of dividend growth. 3M has raised its dividend for 64 consecutive years, and will likely continue to increase the dividend each year for many years to come.
Additionally, the current valuation improves total expected returns over the next five years. 3M remains a strong holding for its above-average dividend yield and annual dividend growth.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: