Updated March 30, 2021 by Bob Ciura
The best dividend growth stocks have the ability to keep long records of steady annual increases in their dividend payouts. That’s why we’re focusing on the Dividend Aristocrats, a group of 65 companies in the S&P 500 index with more than 25 consecutive years of dividend increases.
For a full downloadable table of all 65 Dividend Aristocrats, plus some key financial metrics like value for money, click the link below:
Once a year we review each of the Dividend Aristocrats. The next stock in the series is the industrial manufacturer 3M Company (MMM). 3M has a very impressive track record. It has paid dividends for over 100 years and has increased its dividend for over 60 consecutive years.
This makes 3M a dividend king, an even smaller group of companies with more than 50 consecutive years of dividend increases. There are only 31 dividend kings including 3M.
3M faces a number of uncertainties. As the U.S. economy shows signs of recovery, the ongoing trade war with China and the impact of the coronavirus pandemic continue to weigh on major industrial manufacturers. However, 3M’s successful turnaround could create the conditions for strong returns in the years to come.
3M’s history dates back to 1902 when it was a small mining company. 3M was originally known as Minnesota Mining and Manufacturing.
The founders started with a very simple goal: to harvest corundum from a mine called Crystal Bay. There wasn’t much corundum to be mined, but over the next 114 years 3M grew into one of the largest industrial conglomerates in the world.
Today 3M is a large, diversified global manufacturer. The company manufactures around 60,000 products that are sold in around 200 countries around the world. 3M dominated the industrial manufacturing industry with a strong focus on the most attractive market segments.
The company has invested heavily in its core areas in order to build a product portfolio that is ahead of the curve. 3M consists of four separate departments. The Safety & Industrial division produces belts, abrasives, adhesives and supply chain management software as well as personal protective equipment and safety products. The Healthcare segment supplies medical and surgical products as well as drug delivery systems.
The Transportation & Electronics division produces fibers and circuits with the aim of using renewable energy sources while reducing costs. The Consumer Division sells office supplies, home improvement products, protective materials and stationery.
3M has a market cap of $ 113 billion, making it a large-cap stock. 3M published the results of the fourth quarter and the full year on January 26th, 2021. revenue grew by 5.8% to $ 8.6th Billions for the fourth quarter. Customized eArnings– –Per– –divide rose 43.4% to $ 2.38, $ 0.21 better than expected.
Source: Investor Presentation
Every company within 3M did better in the year– –over– –year in the fourth quarter. Safety & Industrial, which grew organically by 11.4% to $ 3.1 billion. This Segment benefited from higher demand for respiratory masks. Personal safety, roofing granules and industrial adhesives and tapes also showed strength.
Transportation & Electronics revenue rose 1.4% to $ 2.3 billion in the fourth quarter, driven by the strength of the aerospace industryAce, transportation security and advanced materials. Healthcare revenue grew 6.6% to $ 2.3 billion. due to the higher demand to the medical solutions, Food safety and separation and cleaning.
Consumer sales grew nearly 10% to $ 1.4 billion. Home care and consumer health all had higher sales.
For the year, Revenue increased 0.2% to $ 32.2 billion. Adjusted EPS decreased 1.6% to $ 8.75. Bio local– –currengrowth declined 1.7% for the full year, but grew 5.5% in the fourth quarter.
3M expects adjusted earnings per share of $ 9.20 to $ 9.70 and organic earnings Growth from 3% to 6% for 2021.
3M has struggled to generate growth over the past few years. Nonetheless, 3M maintains a promising long-term outlook. We believe the company will be able to grow adjusted earnings per share by 5% per year over the next five years.
While international markets are currently in decline, this looks set to be a short-term challenge. The long-term outlook for emerging markets remains extremely attractive due to the relatively high economic growth rates in the underdeveloped regions of the world.
3M continues to achieve significant growth in health and consumer products, two of its core businesses. Acquisitions should add to its growth, particularly in the healthcare sector, such as the nearly $ 7 billion acquisition of Acelity.
Source: Investor Presentation
Acelity is a leading global medical technology company that manufactures wound care and specialty surgery products under the KCI brand.
Healthcare is a growing industry and the acquisition only adds to 3M’s already strong presence in the healthcare sector.
Competitive advantage and recession performance
Several lasting competitive advantages are required to grow dividends for over 60 years. For 3M, technology and intellectual property are its greatest competitive advantages.
3M has more than 40 technology platforms and a team of scientists dedicated to promoting innovation. Through innovation, 3M has acquired over 100,000 patents throughout its history that help ward off competitive threats.
3M continues to invest heavily in research and development. The company aims to spend ~ 6% of annual sales on research and development. The company’s most recent R&D investments are:
- 2014 research and development costs of $ 1.77 billion
- 2015 research and development costs of $ 1.76 billion
- Research and development expenses of $ 1.73 billion in 2016
- 2017 research and development costs of $ 1.9 billion
- Research and development expenses for 2018 of $ 1.8 billion
3M R&D is so successful at developing new products that approximately 30% of its annual sales are with products that did not exist five years ago. 3M has established itself as the industry leader in all product segments. Their competitive advantages also help 3M to remain profitable even in recessions.
3M’s earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 5.60
- 2008 earnings per share of $ 4.89, down 13%
- 2009 earnings per share of $ 4.52, down 7.5%
- 2010 earnings per share of $ 5.75, up 27%
The company is not immune to recessions, and earnings per share fell in 2008 and 2009. However, it recovered again in 2010. It remained consistently profitable during the recession, which enabled it to further increase its dividend.
Indeed, 3M has a highly secure dividend payout. Based on management guidelines, 3M should have a dividend payout ratio of around 62% for 2021.
Valuation and expected return
Based on the expected adjusted earnings per share of $ 9.45 for 2021, 3M stock has a price-to-earnings ratio of 20.6. This is higher than the average rating. Our fair value estimate is a value for money of 19, which is roughly the 10-year historical average.
This doesn’t make the stock extremely overvalued, but it does make the stock less attractive to invest in. For shareholders, total annual return would decrease 1.6% per year if the stock returned to its average rating by 2026.
Owners of 3M stock can also see returns from earnings growth and dividends. 3M has seen earnings per share grow 6% to 7% over the past decade. We estimate the company will achieve ~ 5% annual EPS growth for the next five years. After all, the stock has a dividend yield of 3%.
The breakdown of the potential returns through 2024 is as follows:
- 5.0% EPS growth
- -1.6% multiple inversion
- 3.0% dividend yield
This results in an expected total return of 6.4% through 2026. This is a modest expected return which leads to a hold recommendation at this point.
3M remains a high quality company and is expected to keep increasing its dividend every year. There are very few companies that can match the company’s history of dividend growth. 3M has increased its dividend for 63 straight years and will likely increase the dividend each year for many years to come.
While the current valuation is not extreme, it does diminish expected total returns over the next five years. 3M remains in a strong position for its above-average dividend yield and annual dividend growth. However, investors looking to add $ 3 million to their portfolio should wait for the stock price to fall, resulting in lower stock valuation and an even higher dividend yield.
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