3M (MMM) is a diversified company in the industrial machinery space, with a global presence in the following businesses: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
The company is among the leading manufacturers of products for many of the markets it serves. Its hundreds of products are sold through numerous distribution channels, including directly to users, and through numerous e-commerce and traditional wholesalers.
Due to the company’s dominance in the space, and the consistent demand for its tools and products among numerous industries, 3M has an extended history of robust sales and profitability.
The company’s constant success is reflected in Dividend Aristocrat status, with 3M boasting a track record of 63 consecutive annual dividend hikes.
Yielding 3.3%, the stock makes for a decent option for income-oriented investors. Still, 3M is likely to appeal to rather conservative portfolios. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks).
Latest Results, Dividend Growth
3M has proven it can flourish in a wide variety of economic conditions. Its business model is rather resistant to the market’s cyclicalities, resulting in the company posting solid results more often than not.
In its latest results, 3M reported organic local-currency sales growth of 21.4% for the quarter, with each division delivering a growth rate at a minimum in the high-teens.
Safety & Industrial sales came in 22.4% higher to $3.3 billion, powered by strength in industrial, automotive, electronics, and construction end markets driven by the ongoing recovery from COVID-19.
Transportation & Electronics was the best performing division, as sales grew 28.1% to $2.5 billion. Health Care advanced 24.9% to $2.3 billion, also regaining momentum off of COVID-19’s struggles. The company took advantage of its improved cash flows to deleverage, with net debt declining by $3.5 billion to $12.7 billion.
Management remained cautious going forward, remarking that it expects headwinds from higher raw materials, and logistics expenses due to higher levels of inflation to take place in the second half of the year. The company revised its guidance for FY 2021, forecasting EPS in a range of $9.70 to $10.10, up from $9.20 to $9.70 previously.
3M’s current dividend payout ratio stands at 58.2%. This is in line with the company’s five-year average, allowing for further dividend increases moving forward.
That said, investors should not expect exciting dividend growth moving forward. The company’s latest DPS hikes were by 2% and 1%, respectively, which is below inflation.
After all, the company is very mature, with minimal growth avenues. For management to maintain a healthy payout ratio, such tiny increases should continue to be the case.
Valuation
While 3M’s dividend growth prospects may be limited, there aren’t many companies yielding over 3% with such an extended dividend growth record, moat, and expertise in the industry as 3M.
At a forward P/E of 17.1, 3M is certainly not cheap considering that net income should only modestly grow in the long run.
Still, investors are buying into a quality business that is unlikely to cut its payouts, and which can be trusted inside income-oriented portfolios.
Wall Street’s Take
Turning to Wall Street, 3M has a Hold consensus rating, based on two Buys, six Holds, and four Sells assigned in the past three months. At $197.09, the average 3M price target implies 7.8% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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