3M (NYSE:MMM) has consistently hit the headlines since the coronavirus outbreak, but for the right reasons. As a leading manufacturer of critical N95 respirator masks, 3M has rapidly scaled up global mask production in recent weeks, supplying them to healthcare workers and the federal government.

So when 3M's first-quarter earnings were set for release on April 28, investors weren't sure what to expect. On the one hand, the COVID-19 pandemic has hit manufacturing companies hard. On the other, prospects of higher revenue from mask production offsetting weakness elsewhere aroused hopes of a not-so-bad quarter from the industrials conglomerate.

3M didn't disappoint. Its personal safety business, which includes respiratory products, was among the few bright spots and contributed almost 12.3% to 3M's total Q1 revenue. While 3M withdrew its 2020 guidance, the three biggest takeaways for investors from the report are:

  • Healthcare business group's standout performance
  • COVID-19 actions
  • New capital allocation policy that excludes share repurchases and prioritizes dividends

A quick look at the numbers

3M's Q1 sales rose 2.7% to $8.1 billion, backed by its healthcare business group, which saw sales jump 21% year over year. The group includes drug delivery, food safety, medical solutions, and oral care, among other things, and made up 26% of 3M's total revenue in the quarter. The segmental year-over-year sales growth was driven entirely by acquisitions, primarily of M*Modal and Acelity last year.

A sticky note saying Thumbs Up.

Image source: Getty Images.

Of its three other business segments, sales from safety and industrial and transportation and electronics declined by low-single-digit figures, while consumer segment sales increased on strong home improvement, home care, and consumer healthcare markets. Key brands like Filtrete, Scotch Blue, Scotch-Brite, and Nexcare brands showed strong growth in sales.

3M's overall sales would've been higher if not for the 1.8% hit from foreign currency headwinds. 3M's GAAP earnings came in 47% higher at $2.22 per share, operating margin improved to 20.6% from 14.4%, and cash from operations grew 16% to $1.2 billion.

However, the company withdrew its 2020 guidance "due to the evolving and uncertain impact of the COVID-19 pandemic."

The quarter was all about COVID-19

For 3M, recent months have been more about COVID-19-related actions than regular business operations. 3M started idle respirator lines to double global N95 mask production to 100 million per month since the beginning of the year, even partnering with Ford and Cummins for the task.

The company has collaborated with the government, key distribution partners, and institutions like the Food and Drug Administration, the Federal Emergency Management Agency, and the U.S. Department of Defense to supply respirators directly to healthcare workers and import masks from its other global facilities to meet demand in the U.S.

Meanwhile, 3M hasn't increased respirator prices despite the massive demand and is striving hard to fight price gouging and fraud.

3M's dividends should continue to grow

There's no denying that the COVID-19 pandemic is hurting 3M's business. Given the uncertainty, management has prioritized "protecting financial flexibility" and announced several moves in the earnings release, including:

  • Cost-reduction efforts to save $360 million to $400 million in the second quarter
  • Lower 2020 capital expenditure budget to $1.3 billion from $1.6 billion to $1.8 billion planned earlier
  • Suspend ongoing share-repurchase program

The last point is particularly noteworthy because 3M has consistently used a combination of share repurchases and dividends as a means to return capital to shareholders in recent years.

Income investors, in fact, have a reason to rejoice: 3M will prioritize organic investments and dividends. "Our first priority is to invest in our business, and second, maintaining our dividend, and lastly, flexible deployment for M&A and share repurchases," said CFO Nicholas Gangestad during 3M's Q1 earnings conference call (full transcript here).

I'd consider management's commitment to dividends the biggest takeaway from 3M's first quarter. 3M is a Dividend King, and the latest development should only reinstate 3M's popularity as a top dividend stock to buy and hold regardless of the business cycle.

To top that, 3M's decision to report monthly sales numbers from May to "provide transparency on 3M's ongoing business performance" should convince investors this management will help the company ride out the storm.