3M (MMM 0.46%) recently declared its latest dividend. There was little fanfare around that raise because it has been commonplace for the industrial giant. It has paid dividends to its shareholders without interruption for over a century, while increasing its payout for more than 60 consecutive years.
That streak puts 3M in the elite group of Dividend Kings, companies with 50 or more years of dividend growth. Meanwhile, its latest raise pushes its dividend yield up to 6.6%, one of the highest levels in the S&P 500. That high yield has many investors worried that 3M might be nearing the end of its dividend growth streak. Here's a look at whether it might have given investors its last raise.
Slowing to a crawl
3M's latest quarterly dividend declaration was $1.51 per share ($6.04 annually). That was up a penny from its prior rate of $1.50 per share each quarter. It matched the meager penny per quarter annual raise the company has provided investors since the pandemic.
Data source: 3M. Chart by the author.
As that chart shows, 3M's dividend growth rate has slowed considerably in recent years. That's certainly a caution flag. It suggests that the company is in a more challenging financial position, which is affecting its ability to increase its dividend.
That's evident when you take a closer look at its financial results. Its sales declined by 4.5% to $32.7 billion in 2023. Meanwhile, its adjusted earnings slumped from $9.88 per share in 2022 to $9.24 last year. Unfortunately, 3M expects more of the same this year. It envisions that its adjusted organic sales will be flat to down 3% this year, while its adjusted earnings will fall to a range of $8.50 to $9.00 per share.
There were some positives. 3M's adjusted earnings came in higher than expected last year as its restructuring program started paying dividends. Meanwhile, its free cash flow is also improving. It was $6.3 billion last year, up 30% from 2022, easily covering the company's $3.3 billion dividend outlay. That enabled 3M to retain cash to strengthen its balance sheet (its net debt declined 17% to $10 billion).
Catalysts that could cause the great reset
While 3M's earnings have declined, its cash flow and balance sheet improved significantly last year. Those factors should put its payout on a more sustainable foundation.
However, a couple of other factors put the dividend at risk: Legal settlements and its upcoming healthcare spinoff. 3M has spent the past few years working to resolve two major legal challenges. It agreed to settlements for two major cases last year. In June, it resolved claims by public water suppliers to help remediate chemicals found in drinking water. It has agreed to pay $10.3 billion over 13 years. In addition, it agreed to a $6 billion ($5 billion in cash and $1 billion in stock paid through 2029) settlement of litigation against the company's Combat Arms earplugs.
One of the ways 3M plans to fund those settlements is by spinning off its healthcare business into a new publicly traded company (Solventum), which it expects to complete during the first half of the year. The company expects to receive a one-time dividend following the spinoff. It will also retain a 19.9% equity stake in the company, which it can monetize in the future. "This, combined with our existing strong capital structure, provides us with the ability to continue to invest in the business, return capital to shareholders, and meet the cash flow needs related to ongoing legal matters," stated CFO Monish Patolawala on the fourth-quarter conference call.
While the CFO notes that the spinoff would enable the company to return capital to shareholders while funding its legal matters, that doesn't necessarily mean it will continue increasing its dividend, or maintain the current level. 3M's healthcare business contributed 25% of its sales and 26% of its segment operating income last year. That means it's about to lose a huge chunk of its earnings and cash flow by spinning off the business. As a result, 3M might opt to reset its dividend to reflect its lower post-spinoff earnings.
That's not uncommon. For example, diversified real estate investment trust W.P. Carey reduced its dividend by about 20% after exiting the office sector, which included spinning off several properties into a new office REIT (Net Lease Office Properties). 3M could follow that same path by resetting its payout following the spinoff.
The end of an era could be nigh
3M has maintained its dividend growth streak in recent years by providing investors with meager raises. However, it seems increasingly likely that its streak will come to an end soon. The company's upcoming spinoff of Solventum could give it a reason to reset its payout to reflect its lower earnings, which would allow it to retain more cash to fund its legal settlements. Because of that, 3M isn't the best option for investors seeking a sustainable and steadily rising income stream right now. Instead, income-focused investors should wait until after the spinoff to see how the dividend shakes out.
