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Is 3M a Great Dividend Stock?

By Reuben Gregg Brewer - Mar 6, 2021 at 8:15AM

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Does 3M have what it takes to be a great dividend stock? Here's a look at some key considerations that might make you believe.

Minnesota Mining and Manufacturing's ticker symbol "MMM" was so iconic that people simply started calling the company 3M (MMM 0.95%) not long after the company started operating in 1902. The moniker stuck and has appeared on its products for much of its history, but management didn't officially change the company's name until 2002. It's a statement of how popular a company 3M has been at times through its 100-year-plus history.

But is it a great dividend stock today? Here's what you need to know.

3M's performance record

Before going too far, it makes sense to address the dividend. 3M has raised its dividend annually for 63 consecutive years. After 25 annual increases, an S&P 500 company qualifies for status as a Dividend Aristocrat, which is a pretty rarefied group. After 50 years, it earns an unofficial moniker as a Dividend King, which is even more rare and remarkable. It's important to note that 3M beats even that rating -- an impressive achievement.   

Fingers flipping a die that says short and long with dice spelling term next to it.

Image source: Getty Images.

Meanwhile, the dividend payout has increased at an annualized rate of around 10% over the past decade. That's roughly three times the historical rate of inflation, which means that the buying power of the dividends investors receive have actually grown over time. To be fair, not every year includes a double-digit percentage hike. The most recent increase was pretty small, but that makes sense given the global coronavirus pandemic and worldwide economic shutdowns used to slow its spread. Still, the word "impressive" still appears like a good descriptor.   

The yield from 3M's dividend, meanwhile, is currently around 3.3%. That's roughly double what you would get from dividend stocks in the S&P 500 index today. It's even more than the 1.4% dividend yield the broadly diversified Vanguard Industrial Index ETF is offering. And, to top it off, 3M's current yield is toward the high end of the company's historical range. The last time the yield was as high as it is today was during the deep 2008-09 economic recession, suggesting the stock is trading at an attractive valuation. The great dividend news just keeps rolling here.   

It's not all good news for 3M

At this point, long-term dividend investors should be pretty interested in 3M stock. But you need to ask some further questions. For example, why is the yield so high relative to the company's own history and its broader industrial peer group? The answer is that 3M isn't perfect. 

In the near term, it is dealing with the economic impact of the coronavirus shutdowns and social distancing. Sales were essentially flat in 2020 and adjusted earnings were down 1.5%. That's not bad given the terrible operating backdrop, but it certainly isn't great. That helps explain at least a portion of the historically low stock price and relatively high yield.  

MMM Dividend Yield Chart

MMM Dividend Yield data by YCharts.

The other piece of the puzzle is that 3M is dealing with some potentially material lawsuits. One centers around environmental issues at production facilities and the other concerns product quality issues. Legal costs are not small matters and can have a big impact on the company's earnings. For example, legal costs at 3M totaled $1.16 per share in 2018 and another $1.01 per share in 2019. So while 3M didn't report significant legal charges in 2020, these lawsuits aren't something you want to simply forget about.   

That said, 3M thinks that 2021 will see sales growth between 5% and 8% and earnings growth between 5% and 10%. Add to that the company's $100 billion market cap and its financial debt-to-equity ratio of around 0.2. In fact, the company actually reduced its net debt (which takes into account cash balances) by 23% in 2020. So the current coronavirus business malaise looks like it could be temporary and 3M seems to have the financial heft to handle further legal costs, even though they may not be pleasant to deal with.   

The final call

Great with caveats (that deserve to be monitored) is probably the best way to label 3M when considering it as a dividend stock. The thing is, no company is perfect, so investors always have to deal with a few warts.

All told, if you want to own a company with an incredible dividend history, a solid business, and an attractive price, then 3M should be on your shortlist today. Just don't forget to keep watching the few issues that have other investors shunning the stock right now.

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Stocks Mentioned

3M Company Stock Quote
3M Company
MMM
$145.75 (0.95%) $1.37

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