investors have had to endure a lot lately, with a slowing economy, rising inflation, and tough-to-quantify legal troubles. Now the dividend is on the list of concerns.
William Blair analyst Nicholas Heymann says his clients are starting to worry. “Investors have asked what about [the dividend] once
spins out its Health Care biz at the end of 2023,” he told Barron’s.
He expects 3M to bring in about $6 billion of free cash flow in 2023, compared with the Wall Street consensus call of about $5.9 billion. Heymann says about 25%, or $1.5 billion, of that free cash comes from healthcare. The $4.5 billion that would be left after the spinoff would still cover the $3.4 billion dividend payout—a figure that assumes the healthcare unit doesn’t lighten the burden by taking on some of the payments.
3M’s growth is slowing—management cut its forecast for the increase in annual sales in July—and inflation reduced the adjusted operating-profit margin to roughly 21% in the second quarter, for a year-on-year decline of about 2 percentage points. But 3M can afford the payout.
The issue for investors is about mounting legal liabilities. Friday provided 3M with a double whammy on that front.
For starters, a judge essentially denied 3M’s attempt to put a subsidiary into bankruptcy protection to limit the potential payout from hundreds of thousands of lawsuits over earplugs sold to the military that may have harmed veterans’ hearing. Bankruptcy would have capped the total liability at about $1 billion; 3M says it will appeal.
Also Friday, the Environmental Protection Agency proposed to declare groups of chemicals known as PFOA and PFAS as hazardous substances under the Superfund law. 3M manufactured those long ago, so the designation could mean the government would require the company to spend billions of dollars on cleaning up.
Costs from those two issues are hard to quantify. They could total tens of billions, according to Wall Street’s rough estimates. A problem of that size would pressure cash flow for years.
3M sounds committed to its dividend. The issue of capital allocation came up as the company took questions from analysts after reporting its second-quarter earnings. The priority in capital allocation is investing in the business, CEO Mike Roman said, but the second item he mentioned was the dividend. It is “a high priority for us and continues to be so,” he said.
3M recently paid a quarterly dividend of $1.49 a share. The stock yields about 4.8%, far higher than the average of about 2% for industrial stocks in the
The dividend “is what folks are asking about that are sticking with the stock,” Heymann added. Not everyone is staying the course: The shares are off about 30% so far this year, for a loss of roughly 50% from the record high they reached in 2018.
The outlook remains uncertain.
Heymann rates 3M stock at Hold, with no formal target for the price. For him, a Hold rating means that the stock should keep up with the overall market.
Only one out of 21 analysts covering 3M stock rate shares Buy. That is less than 5%, while the average Buy-rating ratio for stocks in the S&P 500 is about 58%. The average target for the price is about $144, up roughly 15% from recent levels.
3M’s Next Problem For Investors Could Be The Dividend.
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3M’s CEO says the dividend is a high priority for the company.
Chona Kasinger/Bloomberg
3M
investors have had to endure a lot lately, with a slowing economy, rising inflation, and tough-to-quantify legal troubles. Now the dividend is on the list of concerns.
William Blair analyst Nicholas Heymann says his clients are starting to worry. “Investors have asked what about [the dividend] once
3M
spins out its Health Care biz at the end of 2023,” he told Barron’s.
He expects 3M to bring in about $6 billion of free cash flow in 2023, compared with the Wall Street consensus call of about $5.9 billion. Heymann says about 25%, or $1.5 billion, of that free cash comes from healthcare. The $4.5 billion that would be left after the spinoff would still cover the $3.4 billion dividend payout—a figure that assumes the healthcare unit doesn’t lighten the burden by taking on some of the payments.
3M’s growth is slowing—management cut its forecast for the increase in annual sales in July—and inflation reduced the adjusted operating-profit margin to roughly 21% in the second quarter, for a year-on-year decline of about 2 percentage points. But 3M can afford the payout.
The issue for investors is about mounting legal liabilities. Friday provided 3M with a double whammy on that front.
For starters, a judge essentially denied 3M’s attempt to put a subsidiary into bankruptcy protection to limit the potential payout from hundreds of thousands of lawsuits over earplugs sold to the military that may have harmed veterans’ hearing. Bankruptcy would have capped the total liability at about $1 billion; 3M says it will appeal.
Also Friday, the Environmental Protection Agency proposed to declare groups of chemicals known as PFOA and PFAS as hazardous substances under the Superfund law. 3M manufactured those long ago, so the designation could mean the government would require the company to spend billions of dollars on cleaning up.
Costs from those two issues are hard to quantify. They could total tens of billions, according to Wall Street’s rough estimates. A problem of that size would pressure cash flow for years.
3M sounds committed to its dividend. The issue of capital allocation came up as the company took questions from analysts after reporting its second-quarter earnings. The priority in capital allocation is investing in the business, CEO Mike Roman said, but the second item he mentioned was the dividend. It is “a high priority for us and continues to be so,” he said.
3M recently paid a quarterly dividend of $1.49 a share. The stock yields about 4.8%, far higher than the average of about 2% for industrial stocks in the
S&P 500.
The dividend “is what folks are asking about that are sticking with the stock,” Heymann added. Not everyone is staying the course: The shares are off about 30% so far this year, for a loss of roughly 50% from the record high they reached in 2018.
The outlook remains uncertain.
Heymann rates 3M stock at Hold, with no formal target for the price. For him, a Hold rating means that the stock should keep up with the overall market.
Only one out of 21 analysts covering 3M stock rate shares Buy. That is less than 5%, while the average Buy-rating ratio for stocks in the S&P 500 is about 58%. The average target for the price is about $144, up roughly 15% from recent levels.
Write to Al Root at [email protected]
Source: https://www.barrons.com/articles/3m-stock-dividend-safe-51662058756?siteid=yhoof2&yptr=yahoo