It’s been a while, but 3M (NYSE: MMM) recently formally cut its dividend, declaring a $0.70 dividend for the second quarter, down from the previous quarterly payment of $1.51. Annualizing the dividend means $2.80 per share for the full year, implying a dividend yield of 2.8% based on Wednesday’s closing price.
3M dividend cut
It was no secret that 3M would cut its dividend, as management told investors it planned to pay out 40% of adjusted free cash flow (FCF) in dividends this year. As such, investors already know the dividend/FCF ratio: 40%.
In terms of the dividend to net income ratio, management expects earnings per share of $6.80 to $7.30 (excluding the now separated operations). Solvent), which implies a dividend-to-net income payout ratio of 40% at the midpoint of guidance.
This ratio seems to give 3M some wiggle room to grow its dividend, but remember that it has billions of dollars and multi-year legal settlements to pay, and that the “new” 3M is fundamentally a cyclical business now that the more stable healthcare sector, Solventum, is out more fixed.
Speaking of Solventum, it’s worth noting that 3M left that company with debt. The immediate priority is paying off that debt, which means no dividends for shareholders for the time being.
Can 3M Grow Its Dividend?
If management pays out 40% of its free cash flow in dividends, 3M can grow its dividend as free cash flow grows. That said, some caution is warranted. As previously noted, multi-year legal settlements must be reached and 3M’s revenue growth and margin performance has been mediocre over the past decade.
There are good arguments for buying the shares as a value play. Yet it is not based on the dividend, but on the possibility that new CEO Willam Brown will add strategic vision to a restructuring plan that already appears to be making progress.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M and Solventum. The Motley Fool has a disclosure policy.
What is the dividend payout for 3M stock? was originally published by The Motley Fool
