While the overall market has been rolling over in the last few days,3M Company (NYSE: MMM)has been leading the decline.
After a mediocre year, stock's price spent most of the summer ranging, before dropping almost 6% following the latest dividend payment. As the stock declines, we will examine the dividend – its growth potential, and other important factors.
The company faces nearly 6,000 reinstated lawsuits by patients claiming damage to their health from the Bair Hugger warming system they were exposed to during their joint replacement surgery. These charges were reinstated in August after being initially dismissed in 2019. The details about the potential financial impact, IF the court decides in favor of patients, are not yet known.
Meanwhile, the company maintains 2021 projections at a range between US$9.70 and US$10.10 per share. Revenue growth is guided at 7-10% against 5-8% consensus. Still, this doesn't stop the price from dipping, as it is now moving toward the important support at $180. The next earnings report will be on October 26th, before the market open.
The Dividend Analysis
3M likely looks attractive to investors, given its 3.2% dividend yield and dividend aristocrat status. Some simple analysis can reduce the risk of holding 3M for its dividend, and we'll focus on the most important aspects below.
Dividends are usually paid out of company earnings. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, 3M paid out 58% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders but does limit the capital retained in the business - a double-edged sword.
Looking at the free cash flow in the last year, 3M paid out 48% as dividends, suggesting the dividend is affordable. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Consider getting our latest analysis on 3M's financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point in buying a stock if its dividend is regularly cut or is not reliable.
For this article, we only scrutinize the last decade of 3M's dividend payments, although its dividend history goes much further than that.
During this period the dividend has been stable, implying the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$2.1 in 2011, compared to US$5.9 last year. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time.
It's rare to find a company that has grown its dividends rapidly over 10 years and not had any notable cuts, but 3M has done it, which we really like.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 5.0% a year for the past five years, which is better than seeing them shrink!
Growth of 5.0% is relatively anemic growth, which we wonder about. When a business is not growing, it often makes more sense to pay higher dividends to shareholders rather than retain the cash with no way to utilize it.
When we look at a dividend stock, we need to form a judgment on whether the dividend will grow, if the company can maintain it in a wide range of economic circumstances and if the dividend payout is sustainable.
3M's payout ratios are within a normal range for the average corporation, and we like that its cash flow was stronger than reported profits. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. Overall we think 3M is stock to keep on the watch list, especially since it is on the retreat.
Market movements attest to how highly valued a consistent dividend policy is compared to a more unpredictable one. However, there are other things to consider for investors when analyzing stock performance. For example, we've picked out 2 warning signs for 3M that investors should know about before committing capital to this stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.