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3M Company Hikes Dividend by 6% but Trades at an Elevated Valuation

- By Timothy J. McIntosh

3M Company's (MMM) dividend was increased on Feb. 7 by a solid 6%. Its overall yield is now 2.60%. The company started paying a dividend in 1977.

3M Company is a diversified industrial and technology company that manufactures a wide range of industrial products that are well-known, including Scotch tape and Post-it Notes. Other less known products are within the adhesives, filter, tapes, ceramics, sealants, automotive, paint, roofing, floor mats and health care products categories. The company earns more than 60% of its total revenue from outside the U.S. 3M is based in St. Paul, Minnesota, and was founded in 1902.


3M has maintained a solid three-year dividend growth rate 11.4%. It currently ranks fourth in dividend yield within the large cap services and conglomerates category. The quarterly dividend for the March payment will be $1.175 versus the prior year rate of $1.11 per share..

The dividend will be paid at the new higher rate on March 12, to shareholders of record at close of business on Feb. 17. 3M Company shares are priced at $181.02 as of Friday. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
2/17/2017 1.175
11/16/2016 1.11
8/17/2016 1.11
5/18/2016 1.11
2/10/2016 1.11
11/18/2015 1.025
8/19/2015 1.025
5/20/2015 1.025
2/11/2015 1.025
11/19/2014 0.855
8/20/2014 0.855
5/21/2014 0.855
2/12/2014 0.855
11/20/2013 0.635
8/21/2013 0.635
5/22/2013 0.635
2/13/2013 0.635
11/20/2012 0.59
8/22/2012 0.59
5/16/2012 0.59
2/15/2012 0.59
11/22/2011 0.55
8/17/2011 0.55
5/18/2011 0.55
2/16/2011 0.55
11/17/2010 0.525
8/18/2010 0.525
5/19/2010 0.525
2/17/2010 0.525



Analysis of 3M is based upon five key criteria, which include:

Category Value Score
Dividend Yield 2.60% 196
Dividend Growth (3-7 year avg) 12% 173
Forward P/E 19.33 191
S&P Financial Rating AA- 80
Beta 0.90 125
Total Score 765



Additional information;

% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
2.60% 11.4% 12.6% 53.25 3.40 1.80 3.75 1.94% 2.91%



Positives:

  • 3M's dividend yield is above that of the S&P 500 Index.
  • 3M maintains an investment grade rating of AA-.
  • 3M has maintained a three-year growth rate of dividends of 11.4%
  • 3M's current dividend yield (2.60%) is above its five-year average historical dividend yield.
  • 3M maintains a beta of 0.90, lower than the average company.



Negatives;

  • 3M is trading toward the top of its 10-year average price-sales ratio.
  • 3M maintains very low revenue growth.



Latest earnings and analysis:

3M issued its earnings data on Jan. 24. The company reported $1.88 EPS for the fourth quarter, topping the consensus estimate of $1.87 by one cent. Total revenue for the fourth quarter was just over $7 billion, slightly below analyst estimates. Negative currency translation had a strong impact on total revenue, decreasing revenue by about 1%. 3M maintained total revenue of $30.1 billion in contrast $30.2 billion in 2015.

For full-year 2016, 3M reported earnings per share of $8.16, comparing favorably with earnings per share of $7.58 per share in 2015. 3M's operating expenses also dropped by over 2% in the fourth quarter, helping the bottom line.

Geographically, total sales rose by just over 1% in the U.S., by 4% in Latin America and Canada, and 2.5% in the Asia-Pacific region. On the negative side, total sales declined in the old continent 2.4%, which includes Europe, Africa and the Middle East. In regard to unit sales in each operation, industrials led the charge up 3%. Margins were also higher in this division, up over 2%. Sales were positive within the health care and safety segments, although currency took a bite out of profits. Operating margins in this segment declined by just over 2%. Consumer product sales were down by nearly 1%, as office supply growth was weak.

The company still maintains a solid balance sheet with a growing cash balance. Cash on hand at year-end was at $2.3 billion, up over $500 million from the previous year. Free cash flow was also higher at $5.2 billion, up slightly from 2015. During the last quarter of 2016, 3M paid out $664 million in dividends while also buying back $924 million of stock. For 2017, guidance was positive. The industrial giant expects 2017 earnings per share to be in the range of $8.45 to $8.80 per share. This would be well above the $8.16 earned in 2016. Total revenue growth is expected to be not as robust, in the 1-3% range.

3M has a diversified portfolio with half of sales within the consumer portion of the business. This makes it less prone to economic malaise than many of its customers. Its capital-friendly attitude towards shareholders is also a key advantage.

It has paid dividends for 99 years and maintains a consistent stock buyback program. It has dominant positions in several leading industrial categories like adhesives, filters and coatings. 3M has segmented its overall product mix into six unique segments. All receive strong research and development spending, which accounts for over 5% of total revenue per year. It also has strong exposure to faster growing emerging markets. These markets accounts for nearly half of all sales for 3M. The firm has a strong credit rating from Standard and Poor's, as well as a below-market beta.

Despite the strong record of consistent earnings growth, the company is trading at 19.3 times next year's earnings -- well above the market. Its price-sales ratio is also elevated, and at 3.4 is near its all-time high of 3.75. Its current yield is in the middle of the long-term range. Its revenue growth, at 1-3% on an annual basis, is below average. Overall, 3M is no doubt a blue-chip firm. But one that is priced at a premium price for its growth rate.

Disclosure: I have no position in MMM.

This article first appeared on GuruFocus.