Today we conclude our special report from Bob Ciura — editor of Sure Dividend — offering a countdown of his top dividend aristocrats; here's a look at his number one investment among this select group — 3M Company (MMM).

Our top-ranked Dividend Aristocrats today is industrial manufacturing giant MMM, which has a 5.4% dividend yield, and attractive total return potential. The firm sells more than 60,000 products in more than 200 countries.

3M is now composed of 3 separate divisions: Safety & Industrial, Transportation & Electronics, and Consumer. The company recently spun off its healthcare segment, which now trades independently as Solventum (SOLV).

Business Overview & Recent Events

On January 23rd, 2024, 3M announced fourth-quarter and full-year earnings results. For the quarter, revenue decreased 0.3% to $7.69 billion, which missed estimates by $30 million. Adjusted earnings-per-share of $2.42 increased by 6.1% year-over-year.

For 2023, revenue was lower by 4.5% to $32.7 billion while adjusted earnings-per-share of $9.24 compared to $10.10 in the prior year. However, comparable adjusted earnings-per-share totaled $9.88 in 2023.

Growth Prospects

3M provided an outlook for 2024 as well, with the company expecting adjusted earnings-per-share in a range of $9.35 to $9.75 for the year. Organic sales growth is projected to be flat to up 2%. 3M has grown earnings at a rate of 2.4% per year over the last decade. We are reaffirming our expected growth rate of 5%.

3M’s innovation is one of the company’s greatest competitive advantages. The company targets R&D spending equivalent to 6% of sales (~$1.8 billion in 2023) to create new products to meet consumer demand.

3M’s dividend growth streak shows that the company can thrive in a wide variety of economic conditions. We expect dividend growth to come in at ~2% going forward in order to bring the payout ratio within the historical range.

Valuation & Expected Returns

At the midpoint of 2024 adjusted EPS guidance, 3M stock trades for a 2024 price-to-earnings ratio of 9.8. This is below our fair value estimate of 17, meaning shares are significantly undervalued right now. As a result, an expanding P/E multiple from 9.8 to 17 over the next five years could boost annual returns by 11.6%.

In addition, we expect 5% annual EPS growth, while shares have a current dividend yield of 5.4%. Dividends are expected to add meaningfully to shareholder returns. The company has increased its dividend for 65 consecutive years. The 2024 dividend payout ratio of 63% indicates a secure dividend payout, with room for future increases.

The combination of P/E multiple expansion, EPS growth, and dividends are expected to result in total annual returns of 22.0% per year over the next five years. This makes 3M stock our top Dividend Aristocrat right now.

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