IS 3M A DIVIDEND GROWTH STOCK?

By Luis P. Lopez, Equity Analyst 

Dividend investors search for dividend stocks for a variety of reasons. The U.S conglomerate 3M Company has a long history of paying out stable dividends to its shareholders, but can it continue to grow its dividends in the future? Let’s analyze the company’s historical and recent dividend performance along with its current financial condition and future prospects to determine whether 3M is a dividend growth stock. 

3M Stock & Q4 2021 Financial Results

The company’s stock is currently trading at around $159, its 52-week low, and has lost around 10% since the start of 2022. While the company reported encouraging fourth-quarter results, investors foresee lower demand for its respirators and masks in 2022 as new Omicron cases start to subside.

The company reported sales of $8.6 billion in Q4 2021, a mere increase of 0.3% from Q4 2020. Full-year 2021 sales, however, increased by 9.9% to $35.4 billion from the previous year. Earnings per share for full-year 2021 were $10.12 compared with $9.36 in 2020, which is a rise of 8%. The company paid out $848 million in cash dividends and used $938 million for gross share repurchases, returning $1.8 billion in total to shareholders in 2021. This means that the company can pay higher dividends at any time, but right now management prefers share buybacks as a tax efficient way to return capital to shareholders. 

The company’s adjusted free cash flow amounted to $6 billion in 2021, which shows that the company has strong financial standing and can undertake acquisitions even after accounting for $3.4 billion in dividends that it paid in 2021. The stock’s current dividend yield stands at 3.7% compared to the S&P 500’s and industry’s yield of 1.37% and 2.2%, respectively.

Between 2016 and 2020, the company’s revenue grew at a CAGR of just 7%, net income at the rate of 8%, and free cash flow at the rate of 26%. However, the company markedly improved its revenue and net income growth rate in 2021. The revenue grew by 9.8% year over year to $35.5 billion in 2021, net income by 8.7% to $5.92 billion, which are the highest ever year over year growth rates achieved by the company. 

Historical Dividend Statistics

The company has been continuously growing its dividends for the past 60 years. In 2021, the company increased its annual dividend payments to $5.92 per share, a rise of 0.7% from last year. This includes a dividend payment of $1.48 per share for the fourth quarter of 2021. The dividend payout ratio stands at 58%, with further room for higher payouts even if the EPS growth rate diminishes. Interestingly, the company’s annual free cash flow payout for 2021 also stood at 58%, which is common for dividend-paying companies and signifies that the company has ample profit and cash reserves to sustain the payouts. If we include share buybacks as payouts to shareholders, the ratio jumps up to 96.5%. 

Earnings Position

Over the past five years, 3M’s earnings per share have been growing at the average annual rate of 4.4% compared with the average annual dividends growth rate of 6.85%. The company pays out more than half of its earnings in dividends with a modest EPS growth rate. On average, 3M has grown its dividends by around 10% annually for the past 10 years. 

Some analysts believe that the company’s revenue from personal protective equipment (PPE) will drop due to low demand for its N95 masks following a decrease in Omicron case count in 2022. However, 3M has a diversified product portfolio and does not generate the bulk of its revenues from any one particular segment, so the losses from one business segment would be offset by gains from other business segments. 

Though the company is feeling the heat of inflation, it could not fully pass on the impact of higher raw material costs to customers. According to the company, the costs of ethylene, resins, polypropylene, and labor have increased. It expects that the global semiconductor shortage would also have an impact on its electronics automotive and end-markets.

According to the 3M Company’s CFO Monish Patolawala, “Operating margins were impacted by higher raw materials, logistics, and outsourced hard goods manufacturing costs, manufacturing productivity impacts, along with increased compensation and benefit costs”

Conclusion

3M has an attractive dividend yield of 3.7% and offers growing and sustainable dividends, which places it among the top 25% of dividend-paying companies. Even though the future growth opportunities might be limited, the company’s strong fundamentals suggest that the dividend payments will likely grow in the future. Ample earnings and free cash flows are available to cover dividend payments comfortably. 

With the stock currently available at a 10% discount from last year levels, dividend investors can buy it at a bargain and earn a healthy dividend yield. The stock’s median price to earnings ratio for the previous five-year was 20.6 whereas the current price-to-earnings ratio is 15.8, which shows that the stock is cheap at its current levels. Although the media has focused on a short term decline in sales of masks and personal protective equipment, in reality 3M plays in a diverse range o global markets. With the stock trading at 52-week lows without showing any fundamental weakness, it might be a great bargain opportunity for dividend and value investors.