3M Company is a major component of the S&P 500 and Dow Industrials indexes. The company is also adividend aristocrat, which has been consistently increasing its dividends for 52 consecutive years. Over the past decade this dividend growth stock has delivered an annual average total return of 7.90% to its shareholders.
At the same time company has managed to deliver an impressive 7.70% average annual increase in its EPS since 2000. In 2009 earnings per share fell by 7.60% to $4.52. The expectations for 2010 are for increase EPS to almost $5.15/share and an increase in EPS to $5.69 in 2011. Over the long run however, earnings for this conglomerate are relatively diversified which is a decent buffer during recessions. As the economy rebounds, revenues and profitability would improve. The company also invests almost 6% of its revenues in research and development each year, in order to deliver new products to consumers worldwide. Future growth is expected to also come from acquisitions as well as growth in emerging markets such as China and India. Sales are increasing partly due to strong demand of coatings for TV and Computer displays as well as demand for masks in response to the H1N1 virus.
The ROE has remained largely between 29% and 38% with the exception of a temporary dip in 2001 to 23%. After two years of declines in this indicator, I expect that increased profitability would lift returns in 2010.
Annual dividend payments have increased by an average of 6.50% annually since 1999, which is lower than the growth in EPS. Most recently the company increased its dividend by 3% to $0.525/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 at 45% which is a sustainable level. 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 19.50, yields 2.40% and has an adequately covered dividend payment. I would be a buyer of 3M on dips below $84.
Full Disclosure: Long MMM
Dividend Growth Investor