Money

3M’s Dividend Might Not Be as Safe as It Seems

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It’s not often in this column that we come across a dividend that looks very safe based on the Safety Net model but actually has some significant concerns.

But that’s the case with 3M Company (NYSE: MMM).

Boasting over 68,000 patents, 3M makes thousands of products in 25 categories, such as power cable connectors, labels and lubricants.

Before we get to my concerns, let’s discuss the company’s financials and why the dividend is rated so highly.

Free cash flow rose significantly from $3.8 billion in 2022 to $5.1 billion last year, though it’s still below 2020 and 2021 levels of $6.6 billion and $5.8 billion, respectively.

Of its $5.1 billion in free cash flow last year, 3M paid out $3.3 billion in dividends for a 66% payout ratio. This year, free cash flow is forecast to rise to $5.3 billion and the total dividends paid should increase by roughly $100 million, which would drop the payout ratio to 65%.

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3M has also raised its dividend every year since 1958.

Since Major League Baseball’s Opening Day is tomorrow, let’s put that into a baseball perspective. In 1958, the Yankees – led by Yogi Berra and Mickey Mantle – surged back from a 3-1 deficit to defeat Hank Aaron’s Milwaukee Braves in seven games and win their 18th World Series title.

So the company has a stellar dividend-raising track record, not to mention a strong yield of 5.8% at current prices.

Looking at the financials, 3M can easily afford that dividend…

Or can it?

There are a couple of issues that call the dividend into question.

3M is spinning off its healthcare division, Solventum, this coming Monday. Solventum was responsible for $1.4 billion of 3M’s free cash flow last year, or 28% of the total.

Just as concerning for dividend investors is the news that 3M has settled two large lawsuits that will cost it billions of dollars.

Over the next five years, 3M will pay $6 billion to plaintiffs for selling faulty earplugs to the U.S. military. It has also agreed to pay more than $10 billion for polluting drinking water with what are known as “forever chemicals.” These are man-made chemicals that don’t degrade.

Management has made it clear that it wants to keep paying an “attractive” dividend, but at this point, it is unknown how the spinoff and settlements will affect the company’s ability to pay shareholders down the road.

This is an unusual situation. Based on 3M’s financials alone, I’d give its dividend an “A.” But I simply can’t trust it that much with all the concerning news surrounding the company.

Dividend Safety Rating: C

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