3M Dividend - Slowing or Growing

By Chad Henage - May 1, 2012 | Tickers: MMM, DD | 0 Comments

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54 years is a long, long time. Any company that increases its dividend for this long should get our unquestioned support right? Well not so fast, while 54 years of dividend increases is very impressive, it really only matters if you bought the company 54 years ago. The company is 3M Co. (NYSE: MMM) and what I want to know is, can this streak continue? Secondly, I want to know is the company speeding up or slowing down its dividend growth.

3M is an iconic company not only because of its dividend streak, but also because of the brands they have introduced. Some of 3M products have become so connected to the item. Most people refer to the 3M product when asking for the generic item. Two good examples are: “Can you hand me a Post-it” or “Can you pass the Scotch tape”. When a company's name brand becomes the product everyone asks for, you know that product is quality. However, 3M is much more than these two brands, the company shows at least 19 different product categories on their web page. More impressive, is the fact that 3M doesn't rest on its laurels. The company reportedly gets about 33% of its sales each year from new products.

All of that is great, but what about the dividend? 3M currently pays a yield of about 2.64%. Last year, the company generated about $3.91 billion in free cash flow and paid out $1.55 billion in dividends. This gives 3M a cash flow payout ratio of about 39.64%, and tells us that the dividend certainly should be safe. Capital expenditures have been growing by about 17% a year for the last three years. Unless the company can grow at a faster rate, this free cash flow payout ratio will rise. Analysts expect earnings growth going forward of about 10.60%. If 3M manages to meet this 10%+ growth target, even if capital expenditures rose by 17%, it would take more than 15 years for this negative impact on free cash flow to begin to be an issue. So at this point, we can safely set aside any worry about the dividend being paid.

One question that naturally comes to mind is, can 3M continue to profit from its sales the way they have in the past? Even though right now the payout ratio and trend seems fine, if 3M loses its competitive edge sales could suffer. In the last 3 years, 3M shows a gross margin between 47% and 48%, and sales growth of about 9%, so it seems the company is doing fine in this area.

Past dividend growth shows an interesting history. I believe this history can give us a sense of the direction dividend growth is headed in the future. Take a look at 3M's dividend growth over the last 9 years:

You can see that in the early part of the decade, 3M posted some generous dividend increases. As the company moved closer to the Great Recession, the board slowed down dividend growth. Specifically in the last four years, the company has grown its dividend by an increasing rate. In fact, the dividend's growth rate has increased from just 2% in 2009 to over 7% as of the last increase. This is particularly encouraging to today's investors as this average increase of about 4% in the last 4 years, was during a time when the company was growing earnings by just about 5%. With analysts expecting growth of over 10% going forward, if 3M follows its historical pattern, we could expect dividend growth of 8-9% going forward.

Just for point of comparison, look at 3M's future dividend prospects versus what analysts expect from one of 3M's competitors, E. I. Du Pont de Nemours (NYSE: DD).

While Dupont does beat 3M on current yield, the company has about half the prior growth rate, and a lower expected future growth rate. When you add the fact that Dupont flatlined their dividend from Oct. 2007 to April 2012, you can see why I would suggest 3M could be the better investment.

So there you have it, 3M Co. is not only growing their earnings, and keeping gross margins consistent, but they have turned up the dividend growth as well. The company manages its dividend growth intelligently, growing the dividend at a pace just below earnings growth. If 3M can meet analyst targets for future growth, the dividend should grow at a pace faster than before. 3M is “Leading Through Innovation” and if the company keeps it up, their stock will be leading the way too.

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