With the markets in correction territory, 3M Co. (MMM, Financial)'s stock price was in no ways immune and has fallen 18% so far this year. Meanwhile, the company has just raised its dividend payout to shareholders for the 60th consecutive year.
3M’s 11.07% annualized return has handily beaten the S&P 500 by 3.5% in the past 10 years, making it a wonderful long-term investment.
The industrial company could not have provided steadily growing payouts to its shareholders all this time if not for its excellent business growth and dividend coverage.
3M’s recent quarterly performance, however, may have shaken some of its investors' faith, as it unexpectedly missed Wall Street estimates in both revenue ($8.15 billion versus $8.4 billion estimate) and earnings ($2.58 per share versus $2.70 per share estimate).
3M also lowered its 2018 GAAP earnings expectations to a range of $8.78 to $8.93 per share versus $9.08 to $9.38 previously. The lowering guidance should not cause significant worry as the range still represents strong growth of around 11.7% from last year.
3M also sees an approximate 3% increase in local-currency sales growth for this year compared to 6% a year earlier.
The company did acknowledge its slower growth but declared a further $10 billion share repurchase program weeks later.
3M’s dividend payout ratio, calculated by dividends over net income, has been relatively healthy and has been remained lower than its net income throughout the years.
However, 3M’s free cash flow payout ratio (dividends plus share repurchases divided by its free cash flow generated) indicates that the company has been providing much more to its shareholders than its free cash flow (cash flow from operations less capital expenditures) has generated since at least 2011.
In the past three years, the company has provided 1.3 times more on average to its shareholders through buybacks and dividends than it had generated in free cash flow.
Therefore, 3M had to get cash from somewhere other than its organic operations to provide as shareholder dividends and buybacks in recent years. This could be through selling assets, raising debt or simply acquiring another efficient free cash flow-generating company.
The company did perform a $2 billion acquisition of a Johnson Control’s unit last year and has performed several more divestitures, such as disposing of $15 million and $494 million businesses, since 2017.
These activities, however, do not indicate that 3M is in dire difficulty supplementing its generous payouts.
Nonetheless, 3M is treading water in terms of its payouts, and a cyclical downturn could affect its total amount of disbursements.
So far this year, 3M has provided nearly twice its free cash flow to its shareholders — $6 billion in both dividends and buybacks compared to its free cash flow of $3.1 billion — while overall debt has climbed to $14.8 billion from $11.7 billion a year earlier.
Analysts have an average “hold” recommendation on 3M with a price target of $210.24 per share compared to $195.60 at the time of writing.
In its defense, 3M has an outstanding dividend history and was able to deliver its dividends to shareholders throughout recessions.
Also, the fact that 3M has improved its margins despite weaker sales indicated that the company’s industrial business was able to generally maintain its pricing power despite the presence of industrial cyclicality and competition.
Should calamity strike, investors may still be guaranteed growing dividends as there is a good chance 3M would trim its buyback activities rather than disappoint its loyal shareholder base by cutting its dividends.
Nonetheless, it may still be a good idea to trim some exposure to the company if its price recovers near its 50-day moving average, or $200. At the same time, investors may consider trimming if the company further disappoints with its quarterly expectations on Jan. 29, leading to a lower stock price, while keeping an eye on its free cash flow payout ratio in the years to come.
Disclosure: Long 3M.
