Over the past 10 years 3M Company (NYSE:MMM) has returned an average of 3.0% per year from dividend payouts. The company is currently worth US$124.23b, and now yields roughly 2.6%. Does 3M tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 checks you should use to assess a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has dividend per share amount increased over the past?
- Does earnings amply cover its dividend payments?
- Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
How does 3M fare?
The current trailing twelve-month payout ratio for the stock is 68.4%, which means that the dividend is covered by earnings. However, going forward, analysts expect MMM’s payout to fall to 51.4% of its earnings, which leads to a dividend yield of around 2.8%. However, EPS should increase to $10.27, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. In the case of MMM it has increased its DPS from $2 to $5.44 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. These are all positive signs of a great, reliable dividend stock.
Relative to peers, 3M has a yield of 2.6%, which is on the low-side for Industrials stocks.
With this in mind, I definitely rank 3M as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three pertinent factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for MMM’s future growth? Take a look at our free research report of analyst consensus for MMM’s outlook.
- Valuation: What is MMM worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MMM is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.