Income investors seek a steady stream of dividends. 3M (NYSE: MMM) has a long dividend history, and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
3M is a $122 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.
3M’s 10-Year Dividend History
The company 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 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. Investors have not worried about 3M’s dividend growth. The company has committed itself to raising the dividend annually. Let’s take a look at 3M’s yield.
3M’s 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 2.71% and that’s just slightly below the 10-year average of 2.9%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Intelligent 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 the company 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%. This gives wiggle room for 3M’s board of directors to raise the dividend.
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Good investing,
Robert
