Once a dividend king, 3M (NYSE: MMM) has cut its dividend. There are a number of reasons for this move, but there is one factor that investors should pay particular attention to. This is why dividend investors should be concerned about the depth of 3M’s payout cut.
A brief overview of 3M’s problems
The company has faced significant legal and regulatory headwinds over the past decade. One issue relates to the efficacy of the earbuds the company sold to the U.S. military. Another concerns the company’s production and use of so-called forever chemicals.
These are not small or easy problems that can be addressed quickly. In fact, 3M has spent billions of dollars to fix the problems, and this continues.
The costs were so high that management had to be creative to find a way to address the costs. The decision was to spin off the company’s healthcare division in early 2024.
That division is now a separate entity known as Solvent (NYSE: SOLV). The problem is that this segment was expected to be a growth engine for 3M, effectively forcing management to sell the crown jewels to raise the cash it needs.
A look at 3M’s dividend cut
After the spin-off, 3M cut its dividend. That makes perfect sense, as it jettisoned an entire division and the earnings and revenue it produced. The quarterly distribution was reduced from $1.51 per share to $0.70, a cut of just over 50%. The dividend yield today is around 2.8%.
The return of the industrial company is noticeably above 1.5% Industrial Select Sector SPDR ETF (NYSEMKT:XLI). From that perspective, it remains an attractive income share. But the healthcare division accounted for about 25% of revenue. The dividend cut of more than 50% is therefore far out of line with the size of the spun-off company.
The question dividend investors should ask themselves here is: why such a big cut? The most likely answer is that 3M’s legal and regulatory costs will be enormous and will continue for a long time.
To give itself the financial leeway to deal with those headwinds, it viewed the spinoff as an opportunity to hit the reset button. That’s the right move for the company, but it likely changes the equation for most income investors, and not in a positive way.
In short, 3M is not the same company it was before the spinoff, and it still faces enormous legal and regulatory problems. Higher costs and slower growth are essentially what investors should expect here.
Expect 3M to return to dividend growth
3M will likely start raising its dividend fairly soon, at least by a token amount. That’s probably one of the reasons the cut was so deep.
But if there is a small dividend increase in the coming year, investors shouldn’t take that as a sign of strength. Without healthcare, 3M will likely grow more slowly. And while it has raised much-needed cash through the spinoff, it is still grappling with legal and regulatory headwinds.
A dividend increase won’t change these facts, and it’s likely that only more aggressive investors should be looking at 3M today.
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Reuben Gregg Brewer has positions in 3M and Solventum. The Motley Fool recommends 3M and Solventum. The Motley Fool has a disclosure policy.
Here’s why 3M’s dividend reset should turn off most income investors. originally published by The Motley Fool
