(Published by Bob Ciura on July 12)
3M Co. (MMM, Financial) and Dover Corp. (DOV, Financial) are both tremendous dividend growth stocks. Not only are they both Dividend Aristocrats, but Dividend Kings as well.
The Dividend Aristocrats Excel spreadsheet has 51 stocks with over 25 consecutive years of dividend increases.
3M and Dover have increased their dividends for 59 years and 61 years in a row, respectively.
Both are Dividend Kings, an even more exclusive group of dividend growth stocks.
The Dividend Kings Excel spreadsheet has just 19 stocks, each with at least 50 years of consecutive dividend increases.
Both 3M and Dover have strong businesses and leadership positions in their respective industries.
We will determine which of these two Dividend Aristocrats is the better buy, if investors had to choose one.
Business overview
Winner: 3M
3M and Dover are both large industrial manufacturers, but they serve different product and geographic markets.
3M generated more than $30 billion of total revenue in 2016. Its revenue is split among five segments:
Source: Bernstein Strategic Decisions Conference, page 5
Dover operates four segments:
- Energy (21% of total sales)
- Engineered systems (34% of total sales)
- Fluids (20% of total sales)
- Refrigeration and food equipment (25% of total sales)
Both are high-quality businesses, but 3M outperformed Dover in 2016.
Dover’s organic revenue declined by 5% for the year. Diluted earnings per share for the year came in at $3.25, down 13% from 2015.
Weakness was pronounced in the company’s oil and gas markets. Energy segment revenue fell 9% in the fourth quarter and 25% for the year.
Source: 2017 First Quarter Presentation, page 5
3M had a much better year in 2016. Four out of the company’s five segments posted organic revenue growth.
The company, however, was more affected by the strong U.S. dollar.
3M’s 2016 organic revenue declined just 0.1% for the year, a better performance than Dover. EPS rose 7.7% thanks to margin improvements.
The operating profit margin expanded by 110 basis points for the year.
3M benefited from its diversification last year. It is less exposed to the energy markets than Dover.
Organic sales declined 7.5% in 3M’s electronics and energy segment, but increased 3.5% in health care, 2.2% in safety and graphics and 1.9% in consumer products.
Sales also increased across all geographic areas, indicating the positives of having international diversification. For example, 3M’s organic sales rose 3.7% in Latin America and Canada, much better than 0.5% organic growth in the U.S.
While Dover struggled last year, it has come roaring back to start 2017. It could have better future growth prospects than 3M.
Growth prospects
Winner: Dover
First-quarter revenue increased 12% to $1.8 billion. Organic growth rose 4% while acquisitions drove 12% revenue growth, partially offset by dispositions and foreign exchange.
Adjusted EPS rose 25% year over year.
Source: 2017 First Quarter Presentation, page 3
Dover is firing on all cylinders so far in 2017, generating much stronger growth in the first quarter than blue-chip stalwart 3M.
The reason for Dover’s outperformance so far this year is because it is closely tethered to the U.S. oil drilling industry.
Low oil prices have wreaked havoc on the oil producers, but Dover has actually benefited from the growth in U.S. rig counts over the course of 2017.
The big question is whether the increase in the U.S. rig count so far this year will continue over the remainder of the year and beyond.
Dover is confident the first-quarter momentum will last for the remainder of 2017. Management expects full-year revenue growth of 11% to 13%.
Should U.S. producers decide to trim production, perhaps in an attempt to boost oil prices, Dover could see its momentum come to a screeching halt.
Of course, 3M is no slouch. It has not benefited from the same fundamental factors as Dover, but it is generating strong growth of its own.
3M is off to a good start in 2017.
Organic revenue increased by 4.6% in the first quarter. Sales rose across every operating segment.
Source: Bernstein Strategic Decisions Conference, page 19
3M’s growth projects for 2017 are more modest than Dover’s. Going forward, 3M expects 2% to 5% organic revenue growth this year.
3M, however, is likely to have a smoother growth trajectory over the long term than Dover, which may be more volatile.
3M expects 8% to 11% annual earnings growth as well as over 20% returns on invested capital each year.
Dividend growth
Winner: 3M
Both companies have impressive dividend histories. 3M and Dover have each raised their dividend for more than five decades running.
They also have very similar dividend yields.
Dover has an annual dividend payout of $1.76 per share, for a 2.1% current dividend yield. This is about on par with the S&P 500 Index average.
3M has a 2.2% dividend yield. The difference in dividend yields is essentially immaterial.
In terms of dividend growth, 3M has an advantage going back five years. In that time, the company increased its dividend by approximately 14.7% per year.
At this rate, 3M would double its dividend every five years.
For its part, Dover’s five-year dividend compound annual growth rate is a more modest 11%. Based on this, Dover’s dividend would double every 6.5 years.
Dover’s dividend growth has slowed more recently, however. Its dividend increases in each of the past two years were 5%, reflecting the slowdown in the oil and gas markets.
With Dover’s excellent start to 2017, and its promising forecast for the full year, there is a possibility the company’s dividend growth could accelerate next year.
Given the volatility in the energy sector, however, that is far from a guarantee. Meanwhile, 3M’s dividend growth slowed to 6% this year, but the previous year it gave investors a healthy 8% raise.
Based on its growth projections for 2017, investors can be confident about a high single-digit dividend increase next year.
Final thoughts
Both 3M and Dover are solid stocks for dividend growth. At this point, which stock is the better buy may be best determined by the prospective investor’s tolerance for risk.
Dover is off to a bang to start 2017, but its ongoing performance is more of a wild card than 3M.
Dover’s growth potential for the remainder of the year depends largely on the health of the U.S. oil and gas drilling industry, which could change.
3M is the steadier choice of the two due to its diversified business model, both in terms of product focus and geographic markets.
Disclosure: I am not long any of the stocks mentioned in this article.
