For investors who buy dividend stocks, that magical time of the year when your companies increase their dividend payout is like Christmas morning, or like getting a raise from your job. Who doesn't like a pay raise?
Industrial conglomerate 3M (MMM 0.09%) recently raised its dividend for the 63rd year in a row! But the size of the raise might have investors sweating; management increased the payout by one penny per share per quarter, a 1% overall increase, one that hardly instills confidence. But before investors start panicking, let's review 3M's current business financials and see whether the company's historic dividend track record is actually in trouble.
Checking the dividend math
A company paying and increasing its dividend consistently for 63 years, becoming a Dividend King, doesn't happen by accident. 3M is an industrial conglomerate that sells thousands of products in many industries worldwide and has endured various economic booms and recessions over the years.
For investors, the dividend almost becomes more symbolic of the company itself than the products it sells. It would probably take a dire financial scenario to cut its dividend with that in mind. The payout seems to be on stable ground if you look at the numbers.
The dividend payout ratio is still just 56% of 3M's cash flow, so the business would have to see its profits cut almost in half to threaten the dividend. The company grew organic revenue 8.8% in 2021, so the business seems fine financially.
So why was the dividend raise so small?
The positive metrics just mentioned don't mean that 3M is without issues. A look at the chart below shows the company had a significant drop in free cash flow this year and that was likely the main cause of the small raise. 3M's non-GAAP free cash flow fell 11% year over year in 2021, to roughly $6 billion.
The company's dealing with global supply chain headaches that have impacted operating results, as well as increased litigation expenses stemming from an ongoing legal battle over earplugs it made for the military. Nearly 300,000 claims against 3M could lead to big settlement expenses down the road.
Management is likely holding back on its spending a bit until it has some more visibility into what those costs could look like. Two veterans were awarded $110 million in January, showing how expensive these cases can be. However, with appeals and the possibility of settlements, it's nearly impossible right now to predict how much the lawsuits will cost when it's all said and done.
What's the future look like?
3M's business is doing pretty well from an operational standpoint despite its supply chain headaches. Management guided revenue to grow 2% to 5% in 2022, and for earnings per share (EPS) of $10.15 to $10.65, a 5% increase over 2021 at the high end of guidance.
It's not explosive growth, but 5% earnings growth would be on par with its average EPS growth over the past decade. If broader supply chains worldwide improve in the next year or two, it could boost 3M's business. Supply chain problems hurt 3M's production and potentially its sales because its customers could be dealing with similar issues.
There could be some bumps in the road ahead, but 3M hardly seems like a company that's going off the rails. The small dividend raise isn't ideal, but the stock offers a dividend yield of 3.8%, which is more than many stocks pay today. If the potential litigation expenses scare you off, it's understandable, but the small dividend raise is probably more an act of caution than of desperation.