3M (MMM 1.93%) has seen better days. The industrial giant's stock currently sits at near a 10-year low and is 60% below its peak. That sell-off has pushed its dividend yield up to 5.9%.
The conglomerate is facing several challenges, including litigation and supply chain issues, that have weighed on its results. But I believe 3M will eventually turn things around. That's why I recently took advantage of the decline to buy more shares and lock in its high quality and high yield.
An elite dividend stock
3M's main attraction for me is its dividend. The company has an exceptional track record, having paid dividends for more than 100 years and increased them for the last 65 straight years. That puts it in the elite group of Dividend Kings, companies with 50 or more consecutive years of payout increases. And it has kept those streaks going despite some challenging market conditions over the years.
Key Data Points
The company delivered its latest dividend increase in February, raising its quarterly payout from $1.49 per share to $1.50 per share, or by less than 1%. Given the company's current challenges, it opted for that meager bump to preserve its financial strength.
3M generates more than enough cash to cover its dividend. In 2022, it produced nearly $5.6 billion in net cash from operating activities, amply covering its roughly $3.4 billion of dividend payments and nearly $1.8 billion of capital spending. The company used its excess cash to repurchase shares (nearly $1.5 billion), though those buybacks were partly funded by the cash received from the split-off of its food safety business. Meanwhile, it produced about $900 million of adjusted free cash flow in the first quarter of this year, more than covering its $827 million in dividend payments.
The company further backs its dividend with an elite balance sheet. 3M has A-rated credit. It ended the first quarter with nearly $4 billion of cash, equivalents, and marketable securities on its books against about $16 billion in debt. Meanwhile, total net debt has declined by about 10% over the past year.
Cheap, with a turnaround underway
While 3M's dividend is the main draw, I also like its valuation and turnaround potential. The company expects to deliver adjusted earnings per share of $8.50 to $9 this year. With shares trading recently at around $100, 3M sports a forward price-to-earnings ratio of less than 12. That's a bargain compared to the broader market. The S&P 500 currently fetches nearly 20 times forward earnings, while the Nasdaq 100 trades at a ratio of almost 25.
On the one hand, there are good reasons shares of 3M are dirt cheap. The company expects its adjusted organic sales to be flat to down 3% this year due to declines in its disposable respirator sales and its exit from Russia last year. That's a deterioration from the 1.2% organic sales growth rate it delivered last year. Meanwhile, adjusted earnings are forecast to be below last year's $10.10 per share.
On a more positive note, the company has taken action to turn things around. It announced restructuring moves in the first quarter to make it stronger, leaner, and more focused. While the company expects to record $700 million to $900 million in pre-tax charges, it anticipates that pre-tax savings will offset those charges. Meanwhile, the company is prioritizing investments in high-growth markets where it has scientific competitive advantages. The sum of these moves should help 3M improve its margins and cash flow, which in combination with the eventual conclusions of its legal issues, should lift some of the weight off its stock price.
Bargain shopping for an elite dividend
The headwinds 3M faces have put a lot of pressure on its share price. That pushed its dividend yield up to a very attractive level. I couldn't resist this opportunity to lock in a higher yield on a high-quality company that I believe can eventually turn things around.
