3M Company (NYSE: MMM) has one of the most impressive dividend-raising histories in the stock market.

In February, the company raised its quarterly dividend by a penny per share to $1.50, giving the stock a 5.6% yield. 3M has paid a dividend for more than 100 years and has raised it annually for an incredible 65 years.

There’s no doubt that 3M has weathered a lot of storms in its time. But can it withstand its latest troubles and keep its dividend intact?

Let’s take a look.

The company, which makes everything from medical laboratory supplies to Post-it notes, generates billions in free cash flow. But last year, free cash flow declined significantly, repeating 2021’s performance of lower cash flow. Falling free cash flow is a red flag for the Safety Net system.

This year, free cash flow is forecast to rebound but still be below 2021’s level. In fact, if the 2023 projection is accurate, free cash flow will be at the lowest level since 2013 (with the exception of last year).

Because free cash flow has been falling and the company lifts its dividend every year, last year’s payout ratio was too high. In 2022, 3M paid out 88% of its free cash flow in dividends.

My threshold is 75%. I like to have a buffer in case free cash flow falls so that the dividend won’t be in jeopardy.

This year, if the $4.5 billion in free cash flow is correct, the payout ratio is expected to be 75.6%, just a hair above my limit. Should dividends paid be higher than predicted or free cash flow be lower, the payout ratio will be higher.

Of course, the opposite is true too. So if 3M puts in a better performance than expected, the stock could get an upgrade next year based on the payout ratio.

3M Dividend Rating

The Safety Net ratings model is quantitative. What is not factored into the grade are two major lawsuits in which 3M is the defendant. In one, the company is being accused of providing faulty hearing protection equipment to the U.S. military. The other lawsuit is about the company’s role in producing what are known as “forever chemicals” (human-made chemicals that don’t appear in nature and don’t degrade).

3M could be on the hook for tens of billions of dollars in damages if the cases go against it. And it doesn’t have the cash to pay those kinds of numbers.

3M currently has $3.9 billion in cash with more than $14 billion in long-term debt. So a negative result in these lawsuits could hamper the company’s ability to pay its dividend.

Again, the legal proceedings aren’t factored into the Safety Net rating, but they’re an added variable that could negatively affect the dividend.

Based on just cash flow and the payout ratio, the dividend looks unsafe. I’m not confident that 3M can make it 66 or 67 years in a row.

Dividend Safety Rating: D

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