3M Shows Its "Dividend Power"

05/04/2020 5:00 am EST

Focus: INDUSTRIALS

Prakash Kolli

Founder and Author, Dividend Power

3M Company (MMM) has had a tough couple of years. The company has been impacted by several events that were largely beyond its control including tariffs, trade friction with China, the Boeing 737 Max shutdown, and most recently COVID-19, asserts income specialist Prakash Kolli, editor of Dividend Power.

 The market has punished the stock. 3M is still trading well off its 52-week high and all-time high. The stock has bounced back from its 52-week low, but it is still trading at prices last seen in 2016.

3M is a diversified industrial conglomerate. After a recent reorganization, the company now operates in four business segments: Safety & Industrial, Transportation & Electronics, Health Care, and Consumer.

The company sells over 60,000 products including office supplies, tapes, abrasives, roofing granules, air filters, bandages, personal protective equipment, etc.

Earnings for the first quarter were solid. 3M beat consensus expectations on both revenue and earnings per share while growing organic sales. The company’s strengths were evident as organic sales in Consumer, Healthcare, and Safety & Industrial segments grew. The company has exposure to the automotive and electronics sectors, which dampened results.

3M’s ability to generate robust operating cash flow is a positive during the global economic downturn. The company’s balance sheet is solid with over $4.5 billion of cash and investments.

Only $1.2 billion of debt is due in the remainder of 2020. Interest coverage is over 13X. Leverage has come down some to 2.1X after spiking as a result of the Acelity acquisition.

The company is prioritizing the regular dividend and suspending share buybacks due to the coronavirus crisis. The current yield is ~3.8% compared to ~2% for the S&P 500. The quarterly regular dividend was last raised by 2% to $1.47 per share. The company is one of the few that have raised the dividend for over 50+ years making it a Dividend King.

3M has withdrawn guidance for 2020 due to the coronavirus impact. But analysts’ consensus for 2020 is $8.06 per share. The stock trades at a slight discount to the S&P 500 at an earnings multiple of about 19.0X compared to ~20.8X. I like the stock for long-term investors.

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