Updated on August 30th, 2022 by Josh Arnold
The best dividend growth stocks have the ability to maintain long records of steady annual increases in their dividend payouts. This is why we focus on the Dividend Aristocrats, a group of 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
You can see a full downloadable spreadsheet of all 65 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:
Once per year, we review each of the Dividend Aristocrats. The next stock in the series is industrial manufacturer 3M Company (MMM). 3M has one of the best track records in the entire market when it comes to dividend longevity. It has paid dividends for more than 100 years, and it has raised its dividend for over 60 years in a row.
This makes 3M a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases. There are only 45 Dividend Kings, including 3M.
3M is facing a number of uncertainties, including litigation headwinds, and global supply chain disruptions and logistics challenges. As well, the remnant effects of the coronavirus pandemic can continue to weigh on major industrial manufacturers.
Related: Two’s Are Now Underestimated: The Mikan Drill for Stocks.
Business Overview
3M’s history goes all the way back to 1902, when it was a small mining venture. 3M was originally known as Minnesota Mining and Manufacturing.
Its founders started out with a 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 became one of the biggest industrial conglomerates in the world.
Today, 3M is a large diversified global manufacturer. It manufactures ~60,000 products, which are sold in ~200 countries around the world. 3M came to dominate the industrial manufacturing industry through a sharp focus on the most attractive market segments.
It invested heavily across its core areas of focus to build a product portfolio that leads the pack. 3M is comprised of four divisions. The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software, as well as personal protective gear and security products. The Health Care segment supplies medical and surgical products, as well as drug delivery systems.
Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. The Consumer division sells office supplies, home improvement products, protective materials and stationery supplies.
3M trades with a market capitalization of $72 billion following a sharp selloff in 2022, making it a large-cap stock.
3M reported second quarter earnings on July 26th, 2022, and results for the quarter were largely in line with expectations. Revenue was off 2.8% year-over-year to $8.7 billion, but hit expectations. Adjusted earnings-per-share was $2.48, down from $2.59 a year ago, but beating estimates by four cents.
Organic growth was 1% for the quarter as a strong US dollar somewhat offset top line gains.
Source: Investor Presentation
Management announced it was spinning off the Health Care segment into a standalone company sometime toward the end of 2023. The Health Care business generated $8.6 billion in revenue last year.
We now expect $10.55 in earnings-per-share for this year after the company reduced guidance.
Growth Prospects
3M struggled to generate growth over the past few years. Still, 3M maintains a promising long-term outlook. We believe the company is capable of growing adjusted earnings-per-share by 5% per year over the next five years.
While the international markets are in decline at the moment, this is likely to be a short-term challenge. The long-term prospects for the emerging markets remain highly attractive, due to the relatively high economic growth rates in the under-developed regions of the world.
Source: Investor Presentation
3M faces challenges based on economic conditions, but given its enormous diversification, it tends to hold up nicely. We note that, like Q2 results, 3M’s highly global revenue base means it is susceptible to currency swings. When the US dollar is strong, 3M faces a headwind. It is a tailwind when the dollar is weak, however.
We see temporary headwinds for 3M from a still-struggling auto industry, but again, its diversification should help it continue to grow. Share repurchases will help a bit as well, but likely not more than 2% annually.
Competitive Advantages & Recession Performance
To raise dividends for more than 60 years requires multiple durable competitive advantages. For 3M, technology and intellectual property are its biggest competitive advantages.
3M has more than 40 technology platforms and a team of scientists dedicated to fueling innovation. Innovation has provided 3M with over 100,000 patents obtained throughout its history, which helps fend off competitive threats.
3M continues to invest heavily in research and development. The company aims to spend ~6% of annual sales on R&D. The company’s recent R&D investments are:
- 2017 research-and-development expense of $1.9 billion
- 2018 research-and-development expense of $1.8 billion
- 2019 research-and-development expense of $1.9 billion
- 2020 research-and-development expense of $1.9 billion
- 2021 research-and-development expense of $2.0 billion
3M R&D is so successful in creating new products that approximately 30% of annual sales come from products that didn’t exist five years ago. 3M has established itself as an industry leader, across its product segments. Competitive advantages also help 3M remain profitable, even during recessions.
3M’s earnings-per-share during the Great Recession are below:
- 2007 Earnings-per-share of $5.60
- 2008 Earnings-per-share of $4.89 (13% decline)
- 2009 Earnings-per-share of $4.52 (7.5% decline)
- 2010 Earnings-per-share of $5.75 (27% increase)
The company is not immune from recessions, and its earnings-per-share fell in 2008 and 2009. However, it bounced back in 2010. And, it remained steadily profitable throughout the recession, which allowed it to continue raising its dividend.
Indeed, 3M has a highly secure dividend payout. Based on management’s guidance, 3M is likely to have a dividend payout ratio of roughly 56% for 2022. With projected earnings growth of 5%, we see not only enhanced safety of the dividend, but also the ability for the company to continue raising the payout for many years to come.
Valuation & Expected Returns
Based on expected adjusted earnings-per-share of ~$10.55 for 2022, 3M stock has a price-to-earnings ratio of 12. This is lower than its average valuation. Our estimate of fair value is a price-to-earnings ratio of 19, which is roughly in line with its 10-year historical average.
This makes the stock highly undervalued. Shareholders would see total annual returns improved by 9.6% per year if the stock reverted to its average valuation by 2027.
Owners of 3M stock should also see returns from earnings growth and dividends. 3M has experienced earnings-per-share growth of 6% to 7% over the last decade. We estimate the company will generate ~5% annual EPS growth over the next five years. Lastly, the stock has a very impressive 4.7% dividend yield.
This results in total expected returns of 17.8% through 2027. Due to the very high expected rate of return, we continue to rate the stock a buy.
Final Thoughts
3M remains a high-quality business and is likely to continue raising its dividend each year. There are very few companies that can match the company’s history of dividend growth. 3M has raised its dividend for 64 consecutive years, and will likely continue to increase the dividend each year for many years to come.
Additionally, the current valuation improves total expected returns over the next five years. 3M remains a strong holding for its above-average dividend yield and annual dividend growth.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:
