3M Company operates as a diversified technology company worldwide. The company operates in five segments: Health Care, Industrial, Safety & Graphics, Consumer, Electronics & Energy. This dividend king has paid dividends since 1916 and has increased them for 56 years in a row.
The company’s latest dividend increase was announced in December 2013 when the Board of Directors approved a 34.60% increase in the quarterly annual dividend to 85.50 cents /share. The company’s peer group includes General Electric (GE), Carlisle Companies (CSL), and Raven Industries (RAVN).
Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.
The company has managed to deliver a 9.70% average increase in annual EPS over the past decade. 3M Company is expected to earn $6.72 per share in 2013 and $7.46 per share in 2014. In comparison, the company earned $6.32/share in 2012.
In addition, between 2003 and 2013, the number of shares decreased from 795 million to 692 million. 3M expects to spend somewhere in the range of $17 billion to $22 billion on share repurchases through 2017.
3M has maintained a high level of return on equity over the past decade. However, the indicator has decreased slightly from 34.60% in 2003 to 27% in 2012. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.
The annual dividend payment has increased by 6.80% per year over the past decade, which is lower than the growth in EPS. This was driven by the slow growth in dividends per share between 2007 and 2010, which was in the range of 2 – 4% per annum. In hindsight, it looks that dividend growth rates fluctuate over time, and one should not be scared away from temporary slowdown in income growth.
A 7% growth in distributions translates into the dividend payment doubling every ten years on average. Future dividend growth would have to track growth in earnings per share, and would likely be in the high-single digits.
The dividend payout ratio has increased from 41% in 2003 to almost 67% in 2012. Looking at estimated earnings for 2013 however, the forward dividend payout ratio is 57%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently 3M is attractively valued at 19.10 times estimated 2013 earnings, yields 2.60% and has a sustainable distribution. I like the story for 3M, but would definitely appreciate it better if I can add to my position at lower prices from here.
Full Disclosure: Long MMM
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