Dividend Kings In Focus: 3M Company - Sure Dividend

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Dividend Kings In Focus: 3M Company


Updated on December 1st, 2021 by Bob Ciura

It is not an exaggeration to say that the Dividend Kings are dividend royalty.

To gain entrance to this exclusive club, companies must have at least 50 years of dividend growth. There are just 35 companies on the list. You can see all 35 Dividend Kings here.

You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:

 

Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.

Even among these dividend stalwarts, few can touch 3M Company’s (MMM) history of dividend growth.

The company has increased its dividend for more than six decades. 3M stock has a 3.4% yield as well as annual dividend increases like clockwork.

Business Overview

3M is truly a global company as it has operations in more than 70 countries and sells its products to customers in more than 200 countries.

The company’s portfolio includes more than 60,000 products that are used every day in homes, office buildings, schools, and hospitals among other customers.

3M is now composed of four business segments:

Each of these segments performed well in the third quarter, as the company continues to benefit from the economic recovery.

Source: Investor Presentation

3M reported third quarter earnings results on 10/26/2021. Revenue was higher by 7.1% to just under $9 billion and was $270.5 million above expectations. Adjusted earningspershare of $2.45 was up slightly from the prior year and topped estimates by $0.22.

Organic growth was 6.3% for the quarter and 11.5% through the first three quarters combined. 3M’s adjusted free cash flow fell 29% to $1.5 billion. Net debt declined $2.6 billion to $12.4 billion.

The company noted that it expects an $0.80 to $0.90 headwind from higher raw materials and logistics expenses, up from $0.65 to $0.80 and $0.30 to $0.50 previously. Price increases nearly made up for higher input costs in the third quarter.

3M revised its guidance for the year, with earningspershare expected in a range of $9.70 to $9.90, compared to $9.70 to $10.10 previously. Organic growth is projected to be 8% to 9%.

Growth Prospects

3M has grown earnings at a rate of 6.4% per year over the last decade. We are reaffirming our expected growth rate of 5% per year over the next five years.

3M has increased its dividend for the past 63 years, which shows that the company can thrive in a wide variety of economic environments. This is a solid track record, one made possible by the company’s long-term priorities.

As stated earlier, 3M has a massive portfolio of products, one that continues to grow each year with new patents.

3M also invests heavily in new products, spending upwards of almost $2 billion on research and development annually.

This investment has fueled the company’s long-term growth.

Source: Investor Presentation

3M’s portfolio of products and innovation have allowed the company to raise its dividend each year.

The most recent increase of 1% announced in February 2021 was a small increase, and below the company’s historical average growth rate.

However, the company is still recovering from the pandemic-related economic downturn. The company maintains one of the longest dividend growth streaks in the stock market.

Competitive Advantages & Recession Performance

Perhaps 3M’s most crucial competitive advantage is its innovation.

The company invests heavily in research and development. It’s even one of the relatively few companies that buy ideas from outsiders who have ideas on 3M’s patented products.

The company targets R&D spending equivalent to 6% of sales (~$2 billion annually) in order to create new products to meet consumer demand.

These investments have paid off handily for 3M, as it has more than 118,000 patents and receives roughly 4,000 new patents each year. Approximately 30% of sales during the last fiscal year were from products that didn’t exist five years ago.

Listed below are 3M’s adjusted earnings-per-share results before, during and after the Great Recession:

As an industrial company, 3M is not immune to the effects of a recession. As seen above, the company suffered earnings declines in both 2008 and 2009. EPS fell 19.3% from 2007 through 2009.

However, 3M quickly rebounded and made a new EPS high the very next year.

While it is very likely that 3M’s results will suffer a double-digit decline in the next recession, the company’s product offerings and innovation will likely lead to a rebound during the following recovery.

Valuation & Expected Returns

Shares of 3M currently trade at $174. We expect that 3M will produce earnings-per-share of $9.80 for the year. This gives the stock a price-to-earnings ratio of 17.8.

We have a five-year target price-to-earnings ratio of 19 for the stock. If the P/E multiple rose from 17.8 to 19 over the next five years, valuation expansion would boost returns by 1.3% per year.

Given the company’s prospects for growth and competitive advantages, we forecast an earnings growth rate of 5% annually over the next five years.

3M stock currently offers a dividend yield of 3.4%, which is above its own 10-year average yield as well as the average yield of the S&P 500.

3M’s dividend payout ratio of 60% indicates a safe dividend, with room for continued increases each year.

Putting it all together, the combination of multiple expansion, earnings growth, and dividends could generate returns of 9.7% per year over the next five years.

Final Thoughts

Organic growth for 3M has recovered in 2021 as the overall economy continues to emerge from the coronavirus pandemic.

Dividend increases have slowed down, as the company preserves more cash flow for growth investment.

However, there is still a lot to like about 3M. The company spends heavily on R&D, which has allowed it to create numerous new products that add materially to its long-term growth.

And, 3M’s dividend track record is nearly unmatched, while the current 3.4% dividend yield is very attractive.

3M’s total projected returns are very near 10% annually, which makes the stock a buy in our view. We believe 3M has great potential as a long-term holding for income investors.

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