3M: A High Yield With Market Concerns
Contributor since 2015 / 2275 Followers
Summary:
- Looking at major corporations with a high dividend yield, 3M is near the top of the list.
- While the yield is high, the price has gone down in recent months.
- There are headwinds, and low growth is expected, but the yield might make 3M worth a small investment.
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Investing for dividend income is a popular strategy among those who want to see passive income rolling their way on a regular basis. As long as a company has good fundamentals and keeps them, investors should be able to expect quarterly (or even monthly) dividends to keep hitting their bank accounts or reinvesting into more shares.
When looking at dividend-paying stocks, I like to invest in companies that have a lengthy dividend history. They might not have grown their dividends every single year, but I like to see a dividend chart that moves up in terms of payout as it moves to the right of the chart in terms of chronology. In other words, I want to see the dividend go up over time, even if it doesn’t go up every year. Recent dividend cuts give me pause when I’m looking to make a purchase (outside of ETFs that have more volatile dividend payments).
There can be a temptation, however, to try to reach for yield. When I was looking at investing some money late last year, I came upon 3M (NYSE:MMM), a major conglomerate that has a hand in a variety of different industries that include electronics, industrial products, and health care products, among other things. I’ve known about the company for many years, and I’d considered owning it previously, but had other companies that interested me more.
The yield on 3M at the time I purchased the stock was just a little below the 5% range. Additionally, I remembered that 3M had one of the strongest records of dividend growth in history. Currently, the company has increased its dividend payment for 64 consecutive years. Chasing yield in a company with a strong track record, I decided to purchase a few shares. But was this a good buy? It would actually be a better buy today because the price has dropped by about $30 per share since that time. However, the yield today might benefit those who decide to purchase shares for the long run.
MMM Financials
3M makes a lot of money each year. Indeed, over the past ten years, there has never been a year in which the company has made less than $30 billion in revenue, and this number has grown (with occasional ebbs and flows) from $30.8 billion to $34.2 billion between the 2013 annual report and the 2022 annual report. This is not a huge increase over that time, but it can be hard for really big companies to grow rapidly.
Net income has never fallen below $4.5 billion over the same time frame. There are slight changes each year, but in 2013, the company had a net income of $4.659 billion. This grew to $5.777 billion last year. The net income has actually grown at a rate that’s faster than the revenue growth.
In terms of earnings per share, this number has exceeded $10 per share in each of the past two years. EPS has grown from $6.72 in 2013 to $10.18 in 2022 on a diluted basis.
One of the reasons for the increased EPS number is stock buybacks. The number of shares outstanding has dropped by 18% over the past 10 years. Fewer shares on the market means that net income will be spread among fewer shareholders. Additionally, it means that there are fewer shares on which to pay a dividend, which is good for a company that wants to pay an increasing dividend each year.
The most recent quarterly report showed net income of $1.97 per share. If multiplied by four to get a full-year estimate, this would come in just short of $8 in EPS for the year, which is well within the $6 annual dividend payout that’s in place currently. The company anticipates Q2 EPS coming in at $1.50 to $1.75. The lower number would make it more difficult to continue paying a high dividend over the long run. Seeking Alpha anticipates $8.63 in EPS for 2023.
There have been some headwinds for the company. There is a lawsuit that alleges that defective earplugs led to hearing loss in members of the military. This is currently in mediation and could lead to an expensive settlement, depending upon the outcome, which is unknown at this time.
Other headwinds in recent months cited by MMM in its most recent quarterly report include the exiting of the Russian market last year on account of Russia’s invasion of Ukraine. Additionally, the demand for respirators went down as the COVID-19 pandemic eased. Finally, there have been pricing pressures and supply limitations resulting from the pandemic. 3M sees demand for some products, especially its electronics, increasing as markets return to normal, especially as Chinese demand increases. (China kept its economy closed longer than nearly any nation.) These headwinds have impacted recent quarters, and they will continue to be a concern. However, net income has stayed at a solid level.
On a positive note, 3M has paid down about 10% of its net debt over the past year. Lower debt is important now that interest rates have gone up from where they sat a year ago. Also the current PE ratio is around 10, which is well below the 22 number that’s currently associated with the S&P 500 as a whole. MMM’s PE ratio has also dropped quite a bit over the past five years. Back in 2018, this number sat above 30 for a while, which was higher than that of the S&P at the time. Within MMM’s sector, the PE number of 10 compares well with a number of 15 for the sector as a whole.
A high settlement or judgment in the current lawsuit could hurt earnings in the near term. Additionally, depending upon the global economy, a recession could also hit 3M’s bottom line in the near term. A widening of the current European war and a US debt default could quickly throw a wrench into any investment thesis. To date, however, these numbers have held up well, and net income is well within the parameters it’s been located in for the past decade. If the numbers continue to hold up, 3M appears to be trading at an attractive value.
3M Dividend
The dividend for 3M is at an attractive yield at 6.19% as of market close on May 25, 2023. However, there is a thing as a sucker yield, and this is something that investors should try to avoid at all costs. However, is this truly a sucker yield?
As noted above, the annual dividend for 3M is currently at $6/share, and this dividend has increased over the past 64 years consecutively, a streak that reaches back to the Eisenhower administration. The dividend has more than doubled over the past 10 years, but the five-year growth rate has dropped to 3.36% on an average annualized basis, after generally having 10%+ growth rates for several years before that. Recent increases have come in at $0.01 or $0.02 per quarter, which likely indicates that management sees slower growth in the future.
Last year, the dividend payout ratio was 58%, which is quite sustainable as long as revenue and net income stay at levels that are near what they currently are. Indeed, if MMM can resume a slow growth rate, small dividend increases are likely to continue into the foreseeable future.
Conclusion
The dividend for 3M is strong. Unless the bottom falls out of revenue and income for a couple of years, the dividend should be safe for the near to intermediate term. The company is attempting to simplify its operations and reduce its costs in the near term (including a reduction in the workforce of 6,000 employees). This could improve profitability.
Some of the legal issues that MMM faces could be a wild card, depending upon how they play out. However, if they work out favorably and the damages hit a bankrupt subsidiary, the company could see its price appreciate in the future from its current drop that’s seen it lose about 60% of its price from the all-time high from early 2018. Those who want to take a bit of a risk might decide to initiate a small position to lock in a high yield. Those who hold the company for income will likely want to continue holding.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MMM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am not an investment professional. The preceding is intended for informational and educational purposes. Please make sure to perform due diligence before investing in equities, as losses up to all capital invested can occur.
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