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3M Company (MMM) cut its dividend because of legal settlements, the divestment of the Healthcare segment into an independent company, Solventum, and the need to maintain financial flexibility. It is the third Dividend King to do so in 2024.

The company’s legal challenges caused the share price to fall dramatically to the lowest value in a decade. The share price fell as investors sold this dividend stock because of worries about uncertain liabilities and the potential for a dividend cut. However, we do not expect another reduction in the foreseeable future.

Overview of 3M Company 

3M Company is a diversified conglomerate with global operations. The firm mainly acts as a supplier to other industrial and manufacturing companies. It operates through three segments: Safety and Industrial, Transportation and Electronics, and Consumer. It sells many things like abrasives, adhesives, granules, tapes, personal protective equipment, films, signage, stationery products, etc.

Total revenue was $32,681 million in 2023 and $32,614 million in the past twelve months.

Dividend Cut Announcement

After the market closed on Tuesday, May 14, 3M Company cut its dividend payout. The company’s quarterly dividend rate was $1.51 per share before the announcement. The dividend is now $0.70 per share, a 53.6% reduction. In the quarterly results on April 30^th, the announcement stated,

“In addition, following the spin of Solventum, 3M’s dividend payout ratio is expected to be approximately 40% of adjusted free cash flow. The second-quarter dividend is expected to be declared in May 2024, and is subject to board approval.”

Later, in the actual announcement, the company stated,

“The 3M Board of Directors (today declared a dividend on the company’s common stock of $0.70 per share for the second quarter of 2024. The dividend is payable June 12, 2024, to shareholders of record at the close of business on May 24, 2024. 3M has paid dividends to its shareholders without interruption for more than 100 years.”

Effect of the Change

By executing a nearly 54% dividend cut, 3M sought to reset its dividend even though it was a Dividend King and Aristocrat. After spinning out Solventum (SOLV) and resolving several lawsuits, the company obviously valued its financial flexibility. These settlements will require large payments over many years. The cash flow from reducing the dividend will help in the matter.

Consequently, 3M Company lost its 66-year dividend increase streak and is no longer a Dividend King. This is significant because a company rarely drops off the list because of reducing or omitting the dividend.

That said, three Dividend Kings have fallen off the list in 2024. Leggett & Platt (LEG) and Telephone and Data Systems (TDS) also cut their dividends. 3M is also no longer a Dividend Aristocrat. However, the firm still retains its streak of paying a dividend for 100+ years.

Challenges

3M Company faced several lawsuits, which dragged down results and required taking charges. The lawsuits had billions of dollars in liability. Although the firm litigated many cases, the expenses rose, and the outcome was uncertain. The lawsuits also pressured the share price. In a few of the past five years, the equity was one of the worst performing Dividend Kings. In addition, 3M divested its Healthcare segment.

Earplug Lawsuit

3M settled a combat arms earplug lawsuit with ~300,000 claims in 2024. It will contribute $6 billion between 2023 and 2029, with $5 billion in cash and $1 billion in stock. The firm took pre-tax present value charges.

Public Water Supplier Lawsuit

A second lawsuit about PFAS in public water suppliers was settled a few months earlier. 3M will pay $10.3 billion pre-tax over 13 years to more than 11,000 public water systems. 

Healthcare Segment Spinoff

3M also spun off its Healthcare segment into a standalone business called Solventum. This action removed $8 billion in sales and reduced revenue, earnings per share, and free cash flow.

Dividend Safety

3M’s dividend safety was declining because of the legal liabilities. We discussed these issues when we last updated 3M’s dividend safety analysis. I also exited my position at that time to avoid the risk of a dividend cut.

Moreover, some weak end markets were pressuring revenue and earnings per share. For a well-regarded Dividend King, the dividend safety was sub-optimal. Moreover, as seen on the chart below, the dividend yield had climbed to over 6% before the cut. Although not yet a sign of distress, it was greater than typical.

After reducing the dividend by approximately 54%, the forward dividend yield is around 2.1%. The quarterly rate is $0.70 per share. However, the yield is more than the S&P 500 Index’s average.

The annual dividend now requires about $1.54 billion ($2.80 yearly dividend x 549 million shares), compared to $3.31 billion in 2023. In addition, based on consensus 2024 estimates of $7.27, the dividend payout ratio will contract to around 55.3%. We expect the annual difference in cash flow requirements to be used to pay settlement liabilities.

The dividend is clearly in a better position now, and we do not expect 3M Company to execute another cut soon.

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Final Thoughts on the 3M Company Dividend Cut

3M’s legal liabilities were uncertain and significant. A company rarely has two major lawsuits simultaneously. Even a company of 3M’s size faced difficulties. The legal issues and the Solventum spinout required the firm to slash the dividend because of future settlement payments, lower revenue EPS, and FCF.

Surprisingly, the stock market responded positively. However, 3M Company cut its dividend, losing Dividend King and Aristocrat status.

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