3M (MMM) is one of the leading manufacturers of products utilized in the Safety and Industrial applications, Transportation and Electronics, and Health Care services. The company develops general consumer products (the Consumer segment) such as home improvement and stationery products as well.
3M’s diversified portfolio comprises thousands of products which the company distributes through multiple channels, including direct to consumer and via various e-commerce and traditional wholesalers.
Backed by its prolonged dominance in the industry that has lasted for nearly a century and the constant demand for 3M’s tools and mission-critical products, the company features a long track record of robust revenue and net income generation.
Consequently, 3M has been able to reward its shareholder with growing capital returns for several decades. Specifically, 3M boasts a track record of 64 consecutive annual dividend hikes – one of the most extended records in history.
Following the stock’s decline over the past few months, 3M now trades with a dividend yield close to 4%, which income-oriented investors are likely to appreciate. However, apart from the dividend, 3M’s total return prospects remain rather underwhelming, in my view. Thus, I am neutral on the stock.
Recent Performance
3M’s Q4 results came in rather solid, with the company achieving organic local-currency revenue growth of 1.3%, leading to full-year sales of $35.4 billion, 9.9% higher compared to the previous year.
Specifically, Safety & Industrial revenues came in 2.2% lower to $3.1 billion but still rather solid amid strong sales in closure and masking systems, abrasives, industrial adhesives, and tapes. The Transportation & Electronics and Health Care segments also reported slightly lower sales, declining by 1.5% and 0.7%, respectively.
However, the Consumer segment offset these downfalls as its organic sales increased 4.9% to $1.5 billion, driven by increased revenues in health and safety, stationery and office, home improvement, and home care products.
Despite the ongoing hurdles industrial companies currently face when it comes to rising costs all across the board, 3M managed to retain strong margins.
Specifically, the company ended the year with an operating income of $7.4 billion, suggesting an operating margin close to 20.8%. Accordingly, the bottom line came in rather strong during Fiscal 2021, with adjusted earnings per share landing at $10.12 versus $8.85 in Fiscal 2020, an increase of 14.3%.
Three weeks following its earnings release, management provided its guidance for Fiscal 2022, which points towards another year of stable sales. Management expects total sales growth to be between 1% and 4%, including organic sales growth between 2% and 5%.
EPS is also expected to land between $10.15 and $10.65, implying growth of 10.4% at the midpoint relative to last year. Seeing the company expecting double-digit EPS growth is admittedly quite impressive in the current rising-costs environment.
Is the Dividend Worth It?
As I mentioned, with a 64-year dividend growth track record, 3M is considered one of the most trustworthy stocks amongst income-oriented investors. In fact, Dover Corp. (DOV), Genuine Parts Co. (GPC), Emerson Electric Co. (EMR), and Procter & Gamble Co. (PG) are the only companies featuring an even lengthier dividend growth track record, counting 66, 66, 65, and 65 years of consecutive annual dividend increases, respectively.
Combined with the stock’s decline, which has pushed the yield close to 4%, 3M appears rather attractive when it comes to its income prospects. Further, the midpoint of management’s EPS guidance implies a payout ratio of 57.3%, which suggests enough room for further DPS hikes ahead.
That said, investors should not expect meaningful dividend hikes ahead, in my view. While the company’s guidance implies double-digit EPS growth for Fiscal 2022, this should not be the norm going forward.
3M’s 10-year EPS CAGR stands at just 3.45%, and this includes buybacks that have artificially boosted EPS during this period. After all, the latest guidance implies tiny levels of sales growth as well.
Thus, while 3M is likely to keep growing the dividend, it is likely to do so at an unhurried pace to retain a relatively healthy payout ratio over rather stagnated earnings. This is evidenced by the company’s three-year DPS CAGR, which stands at just 2.86%. The latest dividend hike also points toward this narrative, as the rate of increase was by an even more inferior 0.7%.
Wall Street’s Take
Turning to Wall Street, 3M has a Moderate Sell consensus rating, based on one Buy, eight Holds, and five Sells assigned in the past three months. At $164.36, the average 3M price target implies 9.2% upside potential.
Conclusion
3M is, without a doubt, a legendary dividend-paying stock that is likely to continue serving income-oriented investors rather well. That said, the company is very mature, and sales growth should hardly surpass the single-digit rates going forward. Therefore, it’s quite likely that dividend growth will underperform inflation substantially in the coming years.
Consequently, while the company features robust qualities, including stable and predictable cash flows, investors should not expect extraordinary total returns ahead.
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