On the stock market, as in life generally, it's good to be the King.
Correction: It's good to be one of the Kings. The Dividend Kings, that is -- the clutch of S&P 500 index stocks that have raised their dividends at least once every year for a minimum of 50 years in a row. Among this bunch is one of the sturdiest names in American industry, a company that has never stopped producing piles of cash that it uses to keep that payout growing. Read on to find out more about this monarch.
A tarnished King
This King is 3M (MMM 0.46%), which has cranked its distribution higher for a staggering 65 years in a row. That's a streak eclipsed by only seven other index components (storied consumer goods giant Procter & Gamble and veteran components purveyor Genuine Parts are two of the more familiar of these).
Weakness in the stock price -- more on this in a moment -- has helped push 3M's dividend yield to as high as 6.3% recently. That in itself is eye-catching, particularly considering that the average yield of S&P 500 component stocks is a mere 1.5%. It wasn't always so high.
MMM Dividend Yield data by YCharts
Whenever a prominent stock sees its yield rise steeply, that typically means its price has swooned. When that happens, you should always take a hard look at the underlying reasons why.
With 3M, this is a combination of uninspiring fundamental performance and legal difficulties.
The company's recently released fourth-quarter earnings were met with an investor sell-off. Why? Well, despite a fairly convincing earnings beat, it missed on revenue, and offered bottom-line guidance that was notably short of analyst expectations. For the full year, revenue sagged, and the company posted a headline net loss of almost $7 billion. Investors get spooked by that much red ink.
Profitability has been dinged by those aforementioned legal troubles (specifically, a pair of settlements over the company's military-grade earplugs and its use of so-called "forever chemicals" in manufacturing). 3M is gearing up for these payouts by booking charges of almost $15 billion for the two. That's a major reason it landed so deeply in the red in 2023.
Another area of concern is the looming spin-off of 3M's healthcare division into a stand-alone business called Solventum.
This, somewhat awkwardly, was the only one of the company's four units to post revenue growth for full-year 2023. Investors dislike uncertainty, and the spinoff's somewhat vague timing (it's set to occur sometime in the first half of this year) and questions about the future of the healthcare-less company aren't really helping.
One of the top bargains among the Dividend Kings
Yet, despite those negatives, there were quite a few bright spots in that earnings report.
3M's sprawling restructuring plan is clearly starting to produce results already. That very revealing measure of corporate financial health, free cash flow (FCF), rose a sturdy 32% year over year in 2023 to almost $5.1 billion. Happily for dividend stock lovers, that was more than enough to cover the $3.3 billion in dividend distributions that year. So 3M's high-yield dividend isn't being propped up by an unsustainable dynamic.
2024 guidance fell short of analyst profitability modeling, sure, but 3M is still anticipating some growth in its headline figures. Revenue should be flat to 2% higher over the 2023 number, while non-GAAP (adjusted) net income is anticipated to rise by at least 6%. I should note here that 3M included the future Solventum in this guidance.
Since the dividend is 3M's star attraction for many investors, I think management will do all in its power to maintain that Dividend King status, even after the healthcare unit spinoff. The proceeds of that divestment, by the way, will contribute to the lawsuit settlement payouts. This should ease one of the big concerns keeping folks away from the stock.
I don't feel any of the challenges 3M is facing are insurmountable. The settlements will surely put a dent in the finances. However, this is a powerful company with vast streams of revenue, plus healthy and improving cash flow.
As such, I doubt that yield will stay so lofty. The company's fundamentals look set to improve, and the share price should rise along with them. Meanwhile, 3M's 6.3% figure is in the top three of all 55 current Dividend Kings, eclipsed only by that famously generous "sin stock," cigarette maker Altria Group, and manufacturing company Leggett & Platt.
3M has been part of the American industrial landscape for more than a century. Thanks to its prominence, its size, and those bulging coffers, it'll continue to be a major presence for a long time to come. You don't usually get the chance to get a durable powerhouse like this at such a bargain price... not to mention quite a meaty dividend yield.
