Is 3M A Top Dividend Aristocrat Stock Going Forward? No, Not Good Enough

Summary:

• 3M Company’s Q4 2022 financial performance and its 2023 guidance were disappointing, but MMM continues to do well in the area of shareholder capital return.
• I like MMM’s long dividend payment track record and its attractive dividend yields.
• But I have a less favorable view of 3M Company’s dividend growth expectations and dividend safety metrics.
• A Hold rating for 3M Company is fair; MMM is a decent dividend stock, but it isn’t good enough to be a top dividend aristocrat.

Elevator Pitch

My rating for 3M Company’s (NYSE:MMM) shares stays as a Hold.

With my earlier September 6, 2022 update, I highlighted potential catalysts for 3M Company. I determine if MMM is a top dividend aristocrat in the latest write-up.

3M Company isn’t good enough to be considered as a top dividend aristocrat pick. MMM’s appealing dividend yield and long dividend payout track record are impressive. But 3M Company’s dividend isn’t that safe considering its high dividend payout ratio. Also, the company’s dividend growth outlook for the next three years isn’t favorable, taking into account the expected dividend per share CAGR in the low-single-digit percentage range. A Hold rating for 3M Company is justified in my view.

3M Stock Key Metrics

MMM’s quarterly financial metrics have left investors disappointed, and this is reflected in 3M Company’s recent share price underperformance. Since 3M Company announced its Q4 2022 financial results on January 24, 2023 before trading hours, the stock price has declined by -4.2% as compared to a +2.9% rise for the S&P 500 during the same time period.

3M’s non-GAAP adjusted earnings per share (or EPS) decreased by -6.9% YoY from $2.45 in the fourth quarter of 2021 to $2.28 for the last quarter of the prior year. More importantly, MMM’s actual Q4 2022 normalized EPS was -3.8% lower than Wall Street analysts’ consensus bottom line projection of $2.37. This also marked 3M Company’s first earnings miss in 10 quarters.

The company’s actual Q4 2022 organic revenue growth of +0.4% was significantly below its earlier organic sales growth guidance of +1%-3%. Besides slower than expected topline expansion, MMM also suffered from weaker profitability, as its non-GAAP adjusted operating profit margin contracted by -90 basis points YoY from 20.0% for Q4 2021 to 19.1% in Q4 2022. In its Q4 2022 earnings press release, 3M Company attributed its below expectations quarterly EPS to “rapid declines in consumer-facing markets.”

It seems that 2023 will be a challenging year for 3M Company based on the company’s management guidance outlined in its fourth quarter results media release. MMM expects its top line and bottom line to decrease by -4% and -11%, respectively in 2023 based on the mid-point of its financial guidance. 3M Company highlighted at its Q4 2022 earnings call that “the slowing in demand” observed in January this year and expected “headwinds from material availability and inflation” were the key factors contributing to its weak 2023 guidance.

But MMM’s shareholder capital return was a bright spot for the company in the most recent quarter. Even though 3M Company’s Q4 2022 financial results weren’t as good as what the market had hoped for, MMM continued to return a significant proportion of excess capital to shareholders. As indicated in its Q4 2022 earnings presentation slides, 3M Company generated around $1.7 billion of free cash flow in the final quarter of the previous year, of which more than 80% was returned to shareholders via share buybacks and dividends. Specifically, MMM distributed $819 million of dividends to its shareholders in Q4 2022, and this is equivalent to a quarterly dividend payout of $1.49 per share.

In the subsequent two sections of the article, I discuss the appeal of dividend aristocrats in general and assess if MMM is a top pick among dividend aristocrats.

Are Dividend Aristocrats A Good Investment?

Dividend aristocrats are a good investment, this is a view which is backed by historical data.

S&P Dow Jones Indices published a research report titled “The Importance Of Stable Dividend Income” in September 2021. There are three key takeaways from S&P’s report that are worth noting.

Firstly, the S&P 500 Dividend Aristocrats have delivered better returns (annualized outperformance of +74 basis points) than the S&P 500 for the time period between the beginning of 2004 and the middle of 2021.

Secondly, another study comparing the performance of the S&P 500 Dividend Aristocrats and the S&P 500 between the start of 1990 and mid-2021 showed that the former achieved higher returns with “lower volatility” than the latter as determined by the Sharpe ratio metric.

Thirdly, close to a third of the S&P 500’s total return for the period between January 1926 and June 2021 came from dividends.

The numbers presented above imply that investors should consider including dividend aristocrats as part of their respective investment portfolios, taking into account the attractive risk-reward profile of such stocks.

Is MMM Stock A Top Dividend Aristocrat?

In my opinion, 3M Company isn’t a top dividend aristocrat based on a number of factors.

On the positive side of things, 3M Company’s dividend track record and dividend yield are pretty good.

MMM has increased its dividends for every single year in the past 64 years. This is a much longer dividend track record as compared to the minimum 25 years of uninterrupted dividend increases needed to qualify as a dividend aristocrat.

Separately, 3M Company boasts a trailing twelve months’ dividend yield of 5.1% and a consensus forward next twelve months’ dividend yield of 5.3% (source: S&P Capital IQ). MMM’s yield metrics are much more attractive than the 1.86% dividend yield offered by the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

On the negative side of things, MMM doesn’t score well on the dividend growth and dividend safety criteria.

3M Company’s consensus forward dividend per share CAGR for the FY 2022-2025 period is +3.7%. This is much lower than MMM’s long-term historical dividend per share CAGR of +8.6% for the FY 2002-2021 time frame as per S&P Capital IQ data. As I mentioned in an earlier section of the article, MMM’s Q4 2022 financial performance was poor and its FY 2023 outlook isn’t favorable. As such, it doesn’t come as a surprise that sell-side analysts expect 3M Company to deliver modest dividend growth in the next few years.

Also, MMM’s dividend payout ratios based on GAAP earnings, non-GAAP earnings, and cash flow are reasonably high in the 58%-61% range as per Seeking Alpha data. Therefore, there is a significant risk of 3M Company distributing lower-than-expected dividends in the future. This could be potentially driven by weaker-than-expected earnings growth or a cut in the dividend payout ratio.

In a nutshell, 3M Company is a decent dividend play, but I won’t go as far as labeling it as a “top” dividend aristocrat stock.

Is 3M A Good Long-Term Investment?

I don’t view 3M Company as a good investment for the long term.

It is tough to assess and measure litigation risk with any degree of uncertainty. MMM could continue to be hurt by new adverse regulations and additional legal cases relating to PFAS going forward.

Recently, 3M’s stock price suffered from a correction on January 30, 2023 after “Johnson & Johnson (JNJ) loses appeal on talc litigation” as reported by Seeking Alpha News. This implies that litigation risk is a key issue which investors place a strong emphasis on, and it will be hard for the valuation discount assigned to MMM’s shares relating to litigation risks to narrow significantly in the foreseeable future.

Is MMM Stock A Buy, Sell, Or Hold?

I maintain my Hold rating on MMM’s stock. 3M Company offers an appealing dividend yield in excess of 5%, but I am unimpressed with its dividend safety metrics and dividend growth prospects.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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