3M Company is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 51 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 7.30% to its shareholders.
At the same time company has managed to deliver an impressive 9.40% average annual increase in its EPS since 1999. In 2008 the EPS fell by 12%. The expectations for 2009 are for another drop in EPS to almost $4/share and an increase in 2010. Over the long run however, earnings for this conglomerate are relatively diversified which is a decent buffer during recessions.
The ROE has remained largely between 29% and 38% with the exception of a temporary dip in 2010 to 23%.
Annual dividends have increased by an average of 6.70% annually since 1999, which is lower than the growth in EPS. Most recently the company increased its dividends by 2% to $0.51/quarter. MMM typically enjoys a slow dividend growth during tough economic conditions, while compensating with stronger dividend growth during boom times. 3M’s dividend is safe, given the strong cashflows that the company generates from its diversified businesses.
A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. Since 1973 3M has actually managed to double its dividend payment on average almost every nine years.
The dividend payout has steadily decreased over the past decade; due to the fact the dividend growth was much slower than earnings growth. Currently the payout is a little over 50%, which good. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
3M is currently attractively valued. The stock trades at a P/E of 10.5, yields 4.20% and has an adequately covered dividend payment. I would be a buyer of 3M at current prices, as long as it does not increase above $68.
Full Disclosure: Long MMM
Dividend Growth Investor
About the author:
Mr. Huebscher is the founder and CEO of Advisor Perspectives, a web site and newsletter that provides investment strategy analysis for financial advisors and wealth managers. In 1982, he founded the investment software division of Thomson Financial, where he created the PORTIA product, a portfolio management system for institutional investors. In 1990, he founded Hub Data, a market data redistribution service, which he sold to Advent Software in 1998. He has also worked in the account aggregation field, as a consultant to both vendors and wealth managers. He is a graduate of the Harvard Business School (1982) and Connecticut College (1976).