We recommend that investors in retirement take a closer look at high-quality dividend stocks. To narrow it down, we specifically favor stocks with long histories of increasing their dividends every year, asserts Ben Reynolds, editor of Sure Dividend.
The Dividend Kings are stocks that have each raised their dividends for at least 50 consecutive years. To increase dividends for so many years in a row, a company inevitably must possess competitive advantages, a leadership position in its particular industry, and long-term growth.
3M Company (MMM) is a Dividend King that has increased its dividend for over 60 years in a row. The stock also has a dividend yield of 4.0%, making it an attractive dividend stock for retirees.
Business Overview & Recent Events
3M is a global industrial manufacturer that sells more than 60,000 products that are used every day in homes, hospitals, office buildings and schools around the world. 3M operates four segments.
The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software as well as manufactures personal protective gear and security products. The Healthcare segment supplies medical and surgical products as well as drug delivery systems.
The 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 stationary supplies.
3M has not been immune to the global economic slowdown. On July 26th, 2022, 3M reported second quarter earnings results for the period ending June 30th, 2022. Revenue decreased 2.8% to $8.7 billion, but was in-line with expectations. Adjusted earnings-per-share of $2.48 compared to $2.59 in the prior year, but was $0.04 above estimates.
Safety & Industrial had 0.7% organic growth as this segment continues to see gains in industrial adhesives and tapes, abrasives, and masking systems. Transportation & Electronics revenue grew 0.5% as advanced materials, commercial solutions, and automotive OEM were higher for the quarter. Transportation & Safety and the Consumer segment posted revenue declines, but the health care segment generated 4.4% growth for the quarter.
Inflation has taken its toll, as 3M lowered guidance along with quarterly results. The company now expects adjusted earnings-per-share of $10.30 to $10.80 for the year, down from $10.75 to $11.25 previously. Still, 3M’s dividend is secure.
Dividend Safety & Expected Returns
3M has increased its dividend for 64 consecutive years, giving it one of the longest streaks of dividend hikes in the entire stock market. It has maintained such an impressive track record through its durable competitive advantages, primarily its innovation.
The company targets R&D spending equivalent to 6% of sales (~$2 billion annually) in order to create new products to meet consumer demand. This spending has proven to be very beneficial to the company as 30% of sales during the last fiscal year were from products that didn’t exist five years ago.
We believe 3M’s innovation will generate 5% annual earnings-per-share growth. In addition, the stock is undervalued, with a P/E of 14.3 against our fair value estimate of 19, which is the 10-year average valuation multiple for 3M stock. Lastly, shares currently yield 4.0%, leading to total expected returns of 14.8% per year for 3M.
