One of the “dividend aristocrats” is in trouble—and a payout cut is likely coming. Investors should avoid
3M
stock, at least until the payout is reduced.
3M (ticker: MMM) has paid a dividend for more than 100 years and raised its annual payout for more than 60 years, putting it in rarefied air. The company is one of the 66 dividend aristocrats in the
ProShares S&P 500 500 Dividend Aristocrats
exchange-traded fund (NOBL), a portfolio of firms that have raised payouts for at least 25 consecutive years.
The list might be 65 soon. 3M currently pays a $1.50 quarterly dividend, giving the stock a yield of almost 6%. That’s too high for an aristocrat—the average company yields less than 2%—and demonstrates that investors are worried about something.
That something is 3M’s legal issues—two of them, to be exact. First, the company is defending itself against accusations that it sold faulty earplugs to the military. It also has to worry about so-called forever chemicals—they’re technically known as per- and polyfluoroalkyl substances, or PFAS—that the Environmental Protection Agency designated as hazardous substances in April due to their potential to cause cancer and other health issues.
Settling or fighting both issues will drain liquidity and might make cash preservation a higher priority for the 121-year-old company, famous for its Scotch tape and Post-it Notes.
With 3M stock trading at just 11 times estimated 2024 earnings, below its five-year average of 16 times, it’s possible that those issues are reflected in the price. But that average existed before the legal liabilities started to weigh on the stock. And with all the unknowns, RBC analyst Deane Dray can’t recommend the shares. He rates 3M stock underperform, which is the equivalent of Sell. His price target is $95 a share, down about 6% from recent levels of about $102 a share.
Overall, 3M might have to take on as much as $30 billion in debt to cover all settlements, according to Wolfe Research analyst Nigel Coe. That would take debt levels to about five times earnings before interest, taxes, deprecation, and amortization, or Ebitda, based on 2023 estimates—well above the typical ratio below two times for S&P 500 nonfinancial companies. What’s more, that debt could add more than $1 billion in annual interest expense, which would eat up roughly 20% of projected free cash flow and push annual dividend payouts to more than 80% of projected free cash flow.
“The 3M board faces some hard choices,” writes Coe, who also rates shares the equivalent of Sell and has a $92 price target on the stock.“It isn’t a question of whether, but how much, the dividend resets.”
3M directed Barron’s to recent comments by CEO Mike Roman, who said the dividend has been “a high priority.”
A dividend cut could come when 3M completes the spinoff of its healthcare business, slated for the end of 2023. The new healthcare company is expected to have more debt than the parent company, which will help 3M’s balance sheet. But the spin will also remove healthcare’s earnings, some $2.4 billion in 2022 Ebitda, or 36% of profits, before corporate and other expenses. 3M will hold about 20% of the healthcare IPO, which could be worth $5 billion, but that isn’t enough to shore up the balance sheet, given all the legal woes.
Yes, there might be one or two more $1.50 payouts ahead of the healthcare spin. But investors looking for yield should pass on 3M shares—at least until some of the legal dust settles and the reset is done.
Corrections & Amplifications:
3M might have to take on as much as $30 billion in debt to cover all settlements. An earlier version of this article said it might have to take on $30 million in debt.
Write to Al Root at [email protected]
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