Is 3M Going Too Far in Its Efforts to Reward Shareholders?

Diversified industrial giant 3M Company (NYSE: MMM  ) has big plans in store for investors. The company, traditionally known as a slow-and-steady maker of various industrial products, has now dramatically increased its dividend, announced a huge share buyback authorization, and revealed plans to pursue large acquisitions in the years ahead -- all funded by new debt.

While investors might greet this news with enthusiasm, the more cautious among them might also wonder whether 3M is biting off more than it can chew, especially in light of its relatively modest recent performance.

Huge plans in store
3M is hiking its dividend by an impressive 35%. The company has paid uninterrupted dividends for a truly impressive 97 years, and the dividend increase marks 56 years in a row of annual raises. Furthermore, 3M authorized a gigantic share repurchase plan. The company will spend between $17 billion to $22 billion, amounting to as much as a quarter of the company's current market capitalization.

What's more, 3M has very ambitious acquisitions in mind in the years ahead. To supplement organic growth, 3M will spend between $5 billion and $10 billion on strategic acquisitions through 2017. And that figure could go even higher, should the company find several promising available opportunities.

3M isn't your run-of-the-mill industrial

Many industries, including not just 3M but also Emerson Electric (NYSE: EMR  ) and Dover (NYSE: DOV  ) , are known for their consistent profits driven by steady business models. They're also highly valued for their long histories of paying and raising dividends.

Consider the dividend track records held by Emerson Electric and Dover. Earlier this year, Emerson Electric increased its dividend by 5%. This marked the 57th year in a row of increased dividends for Emerson Electric.

Dover increased its dividend by 7% in 2013, marking its 58th consecutive year of rising dividends paid. According to Dover, it holds the fourth-longest streak of dividend increases for any publicly traded company.

It's easy to notice how far and above 3M went with its own dividend increase and huge share buyback authorization. Normally, well-run industrials raise their dividends in the mid-single digit percentage range. This is due to their diversified business models, which pump out steady, if unspectacular, growth.

Emerson Electric grew underlying sales by 2%, due to its emerging-market success. Sales in its Asia segment increased 2%, more than offsetting flat revenue in the U.S. and falling sales in Europe. Meanwhile, Dover increased revenue by 7% over the first nine months of the year, with acquisitions accounting for 5 percentage points of that growth.

3M's own results are solid through the first several months of this year, although perhaps not strong enough to necessarily warrant a huge dividend increase and share buyback. Its sales and diluted earnings per share have both grown by 3% through the first nine months of the year.

3M's slow-and-steady nature is evident by the fact that prior to its recent announcement, its five-year compound annual dividend growth rate was a more modest 4.9%. As a result, curious investors may be asking what could possibly provide management with such confidence. Consider that 3M's long-term outlook calls for 5% revenue growth and 10% earnings growth annually.

Should investors curb their enthusiasm?
3M is an extremely well-run company with a proven and highly profitable business model. At the same time, a dose of caution may be appropriate, given the relatively modest performance of 3M's underlying business this year. The company's massive plans don't exactly seem prudent at this time, given that its sales and profits are growing only modestly.

However, it appears investors have little choice but to believe in management's ability to predict its own future. Clearly, management is confident that 3M can handle these massive undertakings, and investors have no reason to disagree at this point. As a result, it seems that for now, investors have nothing to worry about, and should simply enjoy the ride.


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