Readers hoping to buy 3M Company (NYSE:MMM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 21st of November in order to receive the dividend, which the company will pay on the 12th of December.
3M's next dividend payment will be US$1.44 per share, and in the last 12 months, the company paid a total of US$5.76 per share. Calculating the last year's worth of payments shows that 3M has a trailing yield of 3.4% on the current share price of $171.88. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. 3M paid out 66% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 62% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at 3M, with earnings per share up 4.6% on average over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. 3M has delivered 11% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Has 3M got what it takes to maintain its dividend payments? Earnings per share have been growing modestly and 3M paid out a bit over half of its earnings and free cash flow last year. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Curious what other investors think of 3M? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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