3M Company (MMM) is a stock that many dividend growth investors love to own. The company is one of the premier industrial companies in the US and has a global presence. 3M is also a Dividend King with 63 consecutive years of dividend growth, making the stock a Dividend King. 3M is only of only nine companies to have paid a growing dividend for 60+ years. Additionally, only seven companies have paid an increasing dividend longer than 3M. However, 3M’s dividend safety has declined in the past several years due to rising debt, lower dividend safety metrics, and lawsuits. However, 3M has recently improved capital allocation, which has stabilized dividend safety. The current dividend yield is over 3%, and valuation has declined, and thus 3M is attractive for those seeking to dollar cost average or add a few shares. 3M’s dividend is not at risk today, but it is prudent to take a deep dive into 3M’s dividend safety.

Overview of 3M Company

3M was founded in 1902 in Minnesota. Today, 3M is one of the largest industrial conglomerates in the US and worldwide. 3M operates in four business segments after downsizing from five. The four business segments are Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. Total sales were $32,184 million in 2020 and $34,734 million in the LTM.

Source: 3M Investor Overview

The largest segment by revenue is Safety & Industrial (36.3% of revenue) followed by Transportation & Electronics (27.3% of revenue), then Health Care (25.8% of revenue), and the smallest segment is Consumer (16.5% of revenue). Revenue was depressed in 2020 due to the adverse impact of COVID-19. 3M’s safety products have benefitted from the pandemic. N addition, 3M is a significant global supplier of N95 masks. However, office and industrial closures in Q2 of 2020 negatively affected the Transportation & Electronics segment sales. The Healthcare segment also suffered due to lower elective surgeries. As a result, margins were also negatively impacted in part of 2020.

3M’s notable brands include Post-it, Scotch, Scotch-Brite, ACE, Command, Filtrete, Nexcare, and Futuro. These brands focus on consumer products and health care and are this more well-known. Many of 3M’s other brands target industrial markets and are less well-known to most consumers. Interbrand ranked 3M as the No. 67 best global brand in 2020, impressive for an industrial brand.

3M’s Dividend and Growth

3M has paid a dividend every year since 1916, making the company one of the few companies to have paid a dividend for 100+ consecutive years. The company is also a Dividend King since it has raised the dividend for 63 straight years. 3M is also a Dividend Aristocrat and is on the Dow 30. 

3M is very popular as an income stock and a dividend growth stock due to its status as a Dividend King. The company has over 172,000 followers on Seeking Alpha, and many articles are related to the dividend. Today, 3M has a dividend yield of approximately 3.37%, more than double that of the average dividend yield for the S&P 500. 

The company has long-term dividend growth and acceptable dividend safety. Dividend safety has improved in the past two years and will be discussed in greater detail below. In addition, the COVID-19 pandemic resulted in operational challenges, but the dividend was not cut or suspended, pointing to its resiliency. In general, companies like 3M have a long-term commitment to the dividend.

The chart below from  StockRover* shows the dividend and growth rate since 2007 superimposed over the stock price chart (in gray). The growth in the regular cash dividend has been approximately 10.4% in the past decade, 5.9% in the trailing 5-years, and 2.9% in the past 3-years. The last dividend increase was only 1% to $1.48 per share quarterly from $1.47 per share in February 2021.

Source: StockRover*

Slowing dividend growth is a concern, but 3M had difficulties due to several events in the past few years. First, tariffs and trade wars negatively impacted 3M due to its global footprint. Tariffs are still in place today. Second, high total debt and interest payments also negatively impacted cash flow. However, 3M is better positioned to grow its dividend at a higher rate in 2021 since the payout ratio has declined, total debt is lower, and capital allocation has improved.

3M flirted with using debt to buy back shares for several years. This debt drove up total debt and eventually made raising the dividend at a higher rate difficult. In past investor overviews and earnings release transcripts, the company has stated that ~30% of capital to the dividend and was the second priority. Share buybacks are now the lowest propriety behind R&D, dividend, and M&A. This is good from the perspective of future dividend growth.

The forward dividend is currently $5.92 per share, giving a forward yield of about 3.37%. 3M started the year with a similar dividend yield placing it on the Dogs of the Dow 2021 list. The chart below from Portfolio Insight shows the yield history for 3M in the past decade is seen in the chart below from Portfolio Insight*. The average 5-year yield is about 2.95%. The chart below indicates that the dividend yield rarely goes over 4%. It only did so in the past decade during the nadir of the COVID-19 pandemic bear market. The dividend yield last went over 4% during the bear market of the Great Recession. The current dividend yield has proven to be an excellent entry-level for adding to existing positions or as an entry point.

Source: Portfolio Insight*

3M’s Dividend Safety

I will now do a deep dive into three dividend safety metrics: earnings, cash flow, and debt. It is important to me as a dividend growth investor for all three to meet my criteria. There are often short-term fluctuations that result in a stock not meeting my standards, but those are usually transient and not long-term. The long-term is essential for dividend growth investors who can capitalize on short-term variation to dollar cost average or buy the dip. Now, let’s do a deep dive into Coca-Cola’s dividend safety.

Adjusted non-GAAP earnings cover 3M’s dividend. In fiscal 2020, Coca-Cola earned $8.89 per share and paid a dividend of $5.76 per share, giving a payout ratio of about 65%. This value is equal to my target value of 65%. I like to see payout ratios below this number for both dividend safety and dividend growth.

However, sales and earnings were down in 2020 due to the COVID-19 pandemic. But in 2019, earnings per share were $10.46, and the dividend was $5.44 per share, resulting in a more conservative payout ratio of ~52%. Looking forward, consensus fiscal 2021 earnings per share is $9.85, and the forward dividend is $5.92 per share, giving a payout ratio of approximately 60%, which is reasonably conservative.

That said, dividend coverage is a little bit lower after accounting for extra items. The additional items vary year-to-year and typically charge for mergers, restructuring, and asset sales.  However, the dividend is covered by diluted earnings in each year in the past decade, as seen in the chart below from TIKR*.

Source: TIKR*

In addition, the dividend is well covered by free cash flow. On a trailing basis, operating cash flow was $8,113 million in 2020 based on data from TIKR*. Capital expenditures were $1,501 million giving a free cash flow of $6,612 million. The forward dividend requires about $3,428 million ($5.92 x 579 million shares). Assuming a similar FCF in 2021 as a low-end estimate, the dividend-to-FCF ratio is about 52%, which is very conservative and below my threshold of 70%. It is good that in a challenging year, 3M’s dividend coverage by free cash flow is still excellent.

For perspective, the cash flow required to pay the dividend has more than doubled from $1,555 million in 2011 to $3,388 million in 2020. The share count has declined by over 110 million shares in the trailing ten years. Before the current CEO, 3M was buying back billions of shares per year but using debt. Share repurchases have significantly been reduced and were only $368 million worth in 2020. For perspective, it was over $5 billion from 2013 to 2015 and over $2 billion in all other years in the past decade.

3M’s total debt was a concern, but it is now declining. A decade ago, 3M had total debt of about $5 billion. It increased by 4X to $23,342 million by Q1 2020. Then, net debt was $18,848 million. Since then, total debt has declined to $19,119 million at the end of Q2 2021, and net debt has fallen to $13,616 million, according to data from TIKR*. In addition, cash, equivalents, and short-term investments were $5,503 million. Lower debt is a very positive development from the context of dividend safety and dividend growth.

Source: Portfolio Insight*

3M’s interest coverage declined for over 30X a decade ago to a low of 13.4X in 2020. Interest coverage is now trending upward at 15.6X in the LTM. The leverage ratio was a minuscule 0.09X a decade ago and peaked at 2.06X in 2019. The leverage ratio is trending down now and is 1.3X in the LTM. The current trends for both interest coverage and leverage ratio are good ones.

On a negative note, 3M’s credit rating is A1 from Moody’s and A+ from Standard & Poor’s. These are investment-grade credit ratings, and 3M can meet its obligations. However, the credit rating is lower than in 2019 due to lower revenue and earnings and higher leverage than in the past.

3M’s dividend safety was declining due to significant increases in the dividend and rising debt until about two years ago. However, the dividend safety metrics have improved, and total and net debt has declined. As a result, overall dividend safety is excellent now. Currently, the metrics do not indicate that the dividend is at risk.

Final Thoughts on 3M (MMM) Dividend Safety Analysis

3M is a popular stock for dividend growth investors to own since it is a Dividend King and has a decent yield historically safe. However, dividend growth has been low for the past 3-years and 5-years. I attribute this to poor capital allocation in the recent past, rising debt, and operational challenges. In addition, as mentioned above, 3M has been faced with tariffs, trade wars, and adverse effects of COVID-19. However, the company has lowered debt and improved interest coverage and leverage ratio in the past two years. As a result, dividend safety has improved.