MMM Dividend Aristocrat: Multinational manufacturing conglomerate 3M (NYSE:MMM) is one of the most historically reliable dividend-paying companies around.
Like most stocks, 3M has seen a considerable selloff this year, potentially creating a buying opportunity for investors. Here’s what you need to know about the 3M passive income machine and why it could be a good fit for your portfolio.
In Q1, 3M reported sales of $8.8 billion, down by 0.3 percent from the previous year. Earnings also fell from $2.95 in 2021 to $2.65 in 2022, a drop of 18 percent. Operating margin likewise dropped from 22.5 percent to 18.6 percent.
It might be easy to dismiss the company based on those numbers alone, but there’s a very bright spot for investors: dividend income.
3M’s Passive Income Power
3M is well-known in the investment world as a top dividend-paying stock. As of the time of this writing, 3M yields 4.08 percent for an annual payout of $5.96 per share.
The dividend has grown at a respectable average annual rate of 4.72 percent over the last five years. And the firm has a payout ratio of 66 percent. The current ratio is higher than the 10-year average of 56 percent, but it’s likely still in a safe range for the dividend to continue growing.
However, 3M isn’t just a favorite dividend stock because of its high yield. The company is one of the most reliable dividend performers in history. 3M stock has paid a dividend for over 100 years, and the dividend has been raised annually for the last 64 years. This places 3M among the small handful of so-called dividend kings in the S&P 500 that have raised their dividends for 50 years or more.
As with all dividend stocks, the real passive income power of 3M comes from the dual forces of dividend reinvestment and compounding interest. If you had invested $10,000 in 3M in January of 1990 and reinvested the dividends, your stake would be worth just over $186,000 today.
Risks To MMM Dividend Payout
Under more normal circumstances, 3M would seem like a natural choice for an income-generating portfolio. The company is large, well-established, has a long history of paying dividends and offers a higher-than-average yield. However, there are a few risk factors investors should be aware of before adding the dividend king to their portfolios.
The most drastic risk for 3M right now is that of supply chain disruption.
3M manufactures goods in 35 countries, giving it massive exposure to global supply chains. With supply chains still badly constrained, disruptions have eaten into 3M’s profits.
As noted above, the company has been reporting lower operating margins, even as revenues have fallen off. Many of these concerns tie back into higher material and transportation costs.
A lack of recent sales growth is also a warning sign for the company. In part, this could be a result of reduced consumer spending as inflation begins to reduce household budgets. However, sales held almost perfectly steady from Q1 2021 to Q1 2022.
While growth would obviously be preferable, a single year of slight losses isn’t the end of the world for a company as large as 3M. It’s also important to keep in mind that 3M has been through several economic shocks before and has kept raising its dividends in spite of these difficulties.
Like many large companies, 3M has also sustained losses due to the Russian invasion of Ukraine. The company ceased doing business in Russia, which was home to two of its production facilities. This also contributed in part to its broader supply chain issues.
3M has also been the target of multiple lawsuits that could result in billions of dollars worth of liabilities for the company. The total potential liability across 3M’s ongoing court cases is estimated at $33 billion. Losses or further cases could squeeze the company even more and damage its credibility among consumers.
Valuation and Target Prices
3M has sold off by 18.9 percent YTD, putting the stock at a considerable discount and raising the yield on shares purchased at today’s prices. This selloff reversed a trend in which rising share prices had brought the yield to multiyear lows. It also opens up the possibility that 3M is undervalued at its current price.
The stock currently trades at a forward P/E of 13.5 and a price-to-sales ratio of 2.6.
Over the next 12 months, 3M has a modest potential upside that is more or less in line with historical market returns.
The median analyst price target is $158.65, up 9.9 percent from the current price of $144.41.
While the upside isn’t massive, it’s also worth keeping in mind that dividends should add about 4 percent, bringing the total return up to a more respectable level.
Is 3M a Good Buy?
While it isn’t without its risks, 3M is very likely a good buy for income-focused investors. Lower prices present an opportunity to buy while yields are still high, potentially boosting long-term returns. Despite its risks, 3M is still a very stable company that is unlikely to be ended by market volatility.
Over the long run, analysts expect 3M to return an average of about 11 percent. This return, coupled with future dividend increases, will most likely compensate investors for the risks associated with the company today. Assuming growth picks up again, 3M should have little difficulty maintaining its streak of solid returns.
Younger investors could see particularly strong benefits to investing in 3M at today’s discounted prices. The company has long since proven its ability to generate long-term returns, especially when dividend reinvestment is taken into account.
Investors who can buy and hold for multiple decades before taking their dividends out as income could see excellent returns. For older investors, 3M offers a strong and reasonably stable source of income and some growth, even without the long-term benefits of compounding. As a result, 3M could be a good addition to many different types of portfolios.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.