Dividend Aristocrats

3M Stock, a 62 Year Dividend Aristocrat

3M is a member of the elite S&P 500 Dividend Aristocrats index. The dividend aristocrats are stocks that have raised dividends for a minimum of 25 consecutive years without missing a single year. As a result, they are some of the best dividend paying stocks investors will find anywhere.

As of 2020, there are 64 dividend aristocrats. Membership requires a minimum $3 billion market capitalization and the stock has to be included in the S&P 500 index.

3M management last raised its dividend by 2% from $1.44 per share in November 2019 to $1.47 per share in February 2020. This is below the 5 year average dividend growth rate of 9%.

Having stated how awesome 3M Stock is, let’s review the company’s business operations, explore latest financial results, dividend growth history, stock valuation and long term performance to the S&P 500 Industrials Sector and the S&P 500.

Business Synopsis

3M is a diversified global technology company employing over 96,000 people and manufacturing products across 4 business segments. The segments are:

  1. Safety and Industrial – This segment serves customers globally in the industrial and safety markets with products like industrial abrasives, autobody repair solutions, respiratory, hearing and eye care protection devices, insulation tapes, cable accessories, precision grinding technologies, etc.
  2. Transportation and Electronics – This segment manufactures products used for repair and maintenance of automotive, marine and aircraft with products like tubes and gaskets for engines, abrasives and adhesives, reflective sheeting used on highways, construction work-zone devices, etc.
  3. Health Care – This division produces health care products for skin, wound care and infection prevention, dentistry and orthodontia, filtration and purification systems, food safety products, coding and reimbursement software, etc.
  4. Consumer Products – This division produces consumer products like bandages, supports and braces, stationery, car care DIY products, paint accessories and air quality solutions, etc.

3M means it when it says the company is a diversified global manufacturer. Generating revenues of $32.1 billion in 2019, each of the 4 segments made meaningful contributions to the bottom line with high operating margins of 21.2%.

Speaking of revenues, 23% or $7 billion was derived from Health Care segment, while Safety and Industrial generated $11.5 billion (36% of total). Transportation and electronics division earned $9.6 billion in revenues while Consumer division generated $5.2 billion.

Source: 3M 2019 Investor Overview

We like management’s balanced capital allocation plan as shown in screenshot below. The company aims to spend 6% of sales on research and development expenses, 30% of its cash flows on its dividend and 40% on flexible deployment plans including acquisitions and share repurchases.

Revenue Analysis and Share Repurchases

For fiscal 2019, 3M generated $32.1 billion in revenues and earned a net income of $4.57 billion. This was a decline of 1.9% year over year from 2018’s $32.76 billion. The company generated operating income margin of 19.2% and net income margin of 14.2% which is quite impressive given the size of its global operations.

Over the last decade, management has grown revenues from $23.12 billion in 2010 to $32.1 billion in 2019. This represents a compounded annual growth rate (CAGR) of 3.3% over 10 years.

Trading on the New York Stock Exchange, 3M Stock has a market capitalization of $90 billion and pays a 3.72% dividend yield. This yield is quite juicy when compared to the dividend yield on the S&P 500 at 2%.

Attached screenshot shows the company’s largest geographical markets including the United States which accounts for 40.9% of worldwide sales at $13.159 billion, Asia Pacific comes in second at almost $9.8 billion, Europe, Middle East and Africa at $6.226 billion and fourth is Latin America at $2.965 billion.

The reason for the revenue decline in 2019 was due to softness in automotive and electronics markets especially in China and inventory channel adjustments due to declining sales.

On a more positive note, 3M generated $5.4 billion in free cash flow for 2019, a 10% growth year over year and its largest surplus in history. Operating margin of almost 22% was another notable achievement for the year as well as $4.7 billion paid in dividends and share repurchases.

In November 2018, 3M’s Board of Directors authorized a share repurchase program of up to $10 billion of all outstanding stock. The company repurchased $2.1 billion worth of stock in 2017, $4.9 billion in 2018 and $1.4 billion in 2019.

3M has been growing its business by acquiring other companies including purchase of Acelity Inc., a  global medical technology company specializing in wound care products and specialty surgical applications. The acquisition was completed in October 2019 and 3M would assume revenues of $1.5 billion from the transaction.

In January 2019, 3M acquired M*Modal for $1 billion. M*Modal is a manufacturer of cloud based artificial intelligence (AI) powered systems that help physicians communicate effectively with their patients. M*Modal provides speech recognition and imaging technologies hosted on cloud based software.

2017 was a huge year for acquisitions with 3M buying Elution Technologies, a manufacturer of food test kits that help food manufacturers test their products for harmful allergens for an undisclosed sum. 3M also purchased Scott Safety for $2 billion.

Scott Safety is a manufacturer of breathing apparatus systems, thermal imaging cameras, protective instruments, respirators, etc. Scott Safety was a division of Johnson Controls and generated revenues of $570 million in 2016.

Growth Outlook

In its 1st Quarter, 2020 earnings released on April 28th, 2020, 3M reported net sales of $8.1 billion, a 2.1% growth from the same quarter last year. Adjusted net income came in at $1.3 billion, implying a 16% net profit margin which is very healthy.

The company experienced strong growth in its Consumer division which grew 6.1% year over year, Safety and Industrial at 2.2% and Health Care at 1.2%. Electronics and Transportation segment saw revenue declines of 3%.

Screenshot above from the company’s earnings release shows strong growth in personal safety (respirators) due to the Covid-19 virus, general cleaning solutions, food safety and bio pharma filtration markets. In terms of geography, Americas grew 4% while China was a disappointment with sales declining 11% year over year.

Dividend Growth History

3M Stock is a member of the S&P 500 Dividend Aristocrats index, having grown dividend payments for a stunning 62 years in a row. There are only 15 stocks that have raised dividends for more than 50 consecutive years, and 3M is one of those special ones.

Management has grown dividends from a modest 96 cents a share in 1996 to $5.76 in 2019. This represents a compounded annual growth rate (CAGR) of 8% over a period of 23 years.

Chart below shows the steady uptrend in 3M’s dividend growth chart. Starting from 2013, the dividend growth really took off as management raised dividend payments by 34% year over in 2014 and 20% in 2015.

Attached chart shows the year over year percent increase in 3M’s dividend growth. During the housing boom years from 2003 to 2006, 3M grew its dividend in high single digits. This rate of growth slowed to low single digits during the great financial crisis of 2009.

However, it is important to note that even during the recession of 2009, 3M did not cut or suspend its dividend payments. In fact, it grew them in low single digits.

Measuring the Dividend Payout Ratio

Lets calculate the dividend payout ratio for 3M. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, 3M generated $7.07 billion in cash from operations and spent $1.7 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $7.07 billion – $1.7 billion

FCF = $5.37 billion

For fiscal 2019, 3M paid out $3.316 billion in dividends. What is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $3.316 billion / $5.37 billion

DPR = 62%

A 62% dividend payout ratio is reasonable given the size of 3M’s global operations, its 62 year dividend growth history and the need for large capital investments to keep innovating.

Long Term Stock Performance

3M Stock has risen from a modest $20 in January 1990 to $158 as of June 2020. This represents a compounded annual growth rate of 7% over a period of 30 years. This closely matches the dividend growth rate of 8% annualized over the last 23 years.

Looking at the long term chart below, we can see the stock hit highs of $260 in January 2018, and has dropped to $158 as of June 2020.

Stock Valuation

Bloomberg Analysts’ Consensus expects 3M to earn $8.1 in earnings per share for 2020. Using the current stock price of $158 and dividing in to the expected earnings, we arrive at a forward price to earnings ratio of 19.5 times. As a comparison, the S&P 500 currently trades at a forward PE of 22 times earnings.

3M is a member of the S&P 500 Industrials Sector (XLI) and trades at a slightly higher valuation than its peers trading at 16.5 times forward earnings.

Reasons for this over valuation include globally diversified operations, huge competitive moat that cannot be easily duplicated, 62 years of dividend growth history, and a nice dividend yield of 3.6%.

Executive Summary

Here is what we like and don’t like about 3M Stock.

Likes

  • 62 years of growing dividends making this a dividend aristocrat stock.
  • Dividend payout ratio of 62%. This is quite reasonable given its 62 years of dividend growth history, and the need for large capital expenditures and research and development spending.
  • Revenue growth of 3.3% CAGR over 10 years which seems low. However, management has been making efforts to optimize margins by divesting low margin businesses and acquiring high margin businesses.
  • A superb dividend yield of 3.7% which is very nice for income investors.

Dislikes

  • 3M Stock trades at 19.5 times forward (2020) earnings which is a premium to its peers in the S&P Industrials Sector (XLI).
  • High debt load of $20.3 billion is particularly concerning. During an economic downturn, the company could be cash strapped and might have to refinance debt at a higher interest rate.
  • A 5 year Earnings Per Share growth rate of just 0.85% due to high restructuring charges, legal fees and result of divesting low performing businesses.
Market Capitalization $90 Billion
Dividend Yield 3.7%
Forward PE Ratio 19.5 times 2020 earnings
Dividend Growth (5 Year Avg.) 9%
Dividend Payout Ratio 62%
EPS Growth (5 Year Avg.) 0.85%
2019 Revenues $32.1 Billion
Gross Margin 47.6%
Net Margin 16%

3M Stock Ex Dividend Dates

Visit the company’s Investor Relations | Dividend Information website to see a history of dividend payments, ex dividend dates and payable dates.

Declared Ex-Dividend Record Payable Amount Per Share*
05/12/2020 05/21/2020 05/22/2020 06/12/2020 $1.470
02/04/2020 02/13/2020 02/14/2020 03/12/2020 $1.470
Total Dividends in 2020: $2.940
11/12/2019 11/21/2019 11/22/2019 12/12/2019 $1.440
08/06/2019 08/15/2019 08/16/2019 09/12/2019 $1.440
05/14/2019 05/23/2019 05/24/2019 06/12/2019 $1.440
02/05/2019 02/14/2019 02/15/2019 03/12/2019 $1.440
Total Dividends in 2019: $5.760
11/13/2018 11/21/2018 11/23/2018 12/12/2018 $1.360
08/14/2018 08/23/2018 08/24/2018 09/12/2018 $1.360
05/08/2018 05/17/2018 05/18/2018 06/12/2018 $1.360
01/25/2018 02/15/2018 02/16/2018 03/12/2018 $1.360
Total Dividends in 2018: $5.440
11/14/2017 11/22/2017 11/24/2017 12/12/2017 $1.175
08/15/2017 08/23/2017 08/25/2017 09/12/2017 $1.175
05/09/2017 05/17/2017 05/19/2017 06/12/2017 $1.175
02/07/2017 02/15/2017 02/17/2017 03/12/2017 $1.175
Total Dividends in 2017: $4.700

3M Stock Price

To view the latest price of 3M Stock, visit the company’s Investor Relations website and select “Stock Information.”

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