3M may be poised to cut its dividend - and break with a 64-year tradition, says analyst

By Ciara Linnane

Company is grappling with legal settlements and a slowdown in growth and margins that are making its dividend difficult to sustain

3M Co. may be poised to reduce its dividend after a multi-year slide in its stock price, as the company grapples with litigation related to "forever chemicals" and faulty earplugs sold to the U.S. Military, CFRA said.

3M (MMM) has paid a dividend for more than 100 years and increased it for the past 64 years, as the company says on its website. That has placed it squarely in the "Dividend Aristocrat" group, the name given to companies that have raised their payouts for at least 25 straight years.

"There is growing skepticism as to whether this can continue following the Solventum spinoff," said CFRA analyst Jonathan Sakraida, referring to 3M's healthcare unit, which was spun out of the parent on April 1.

That was the day that 3M's previously announced $12.5 billion settlement agreement with U.S. public water suppliers received final approval from a U.S. District Court in Charleston, S.C.

The settlement was reached to cover the company's role in contaminated drinking water with per- and polyfluoroalkyl substances, also known as PFAS or "forever chemicals."

The maker of Post-it Notes, Scotch tape and N95 masks said it has recorded an accrual of $10.3 billion related to the settlement, which reflects the pretax present value of the expected payments over 13 years.

Payments are scheduled to begin in the third quarter of 2024, provided there are no pending appeals of the final approval order.

"3M also continues to actively engage in insurance recovery activities," the company said in a statement at the time.

The deal came a week after 3M said that its Combat Arms Earplug litigation was nearing its final resolution, with the company agreeing to pay up to $6 billion to settle all claims.

The company had been sued by hundreds of thousands of plaintiffs, mostly former soldiers who said the earplugs had caused hearing loss.

Related: 3M to pay $6 billion as Combat Arms Earplug settlement nears final resolution

"Despite these steps to resolve the firm's legal troubles, there are still outstanding claims of personal injuries and environmental damages from PFAS contamination that add to uncertainty around 3M's ability to sustain and grow its dividend," CFRA's Sakraida said in a late Wednesday report.

"Gross margins have drifted lower over the past decade, falling from a peak of 49.8% in 2016 to a low of 43.8% in 2023," he said.

The stock's current dividend yield of over 6.5% is well above the company's 30-year average of 2.8% and the S&P 500's yield of around 1.4%, he said.

Cash-flow generation will be impacted by the Solventum spinoff, as the healthcare business accounted for about 28% of 3M's cash flows from operations on average for the last three years. That, combined with future settlement payments and a slowdown in growth, has raised questions about the sustainability of the current dividend payout.

3M's dividend payout ratio - the percentage of earnings paid out to shareholders via dividend - has averaged just over 57% for the past 10 years. But consensus and CFRA net income forecasts suggest that metric is set to go above 80% in 2024, excluding the healthcare business, and would likely remain at that level through 2026, assuming earnings growth remains in the low single-digits, said the analyst.

"An 80% payout ratio would be meaningfully higher than other industrial peers and would limit 3M's capacity to pay off debt and reinvest into restructuring efforts, M&A and organic growth opportunities," said Sakraida.

To be sure, 3M did receive almost $8 billion from the Solventum spinoff, but most of that will go to cover settlements, debt repayment and other transformation efforts.

And CEO Mike Roman is due to be replaced by William Brown, a former CEO of L3Harris Technologies (LHX), on May 1. Brown is less likely to feel beholden to previous commitments and is likely to want to engineer a turnaround in the operating performance and fuel growth.

"A reduced dividend could give 3M additional breathing room to address pending lawsuits that have not yet settled, deleverage, as well as deploy extra capital toward share buybacks while valuation remains depressed," said the analyst.

3M's stock was slightly higher Thursday, but has fallen 47% from its most recent high in May of 2021.

-Ciara Linnane

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04-19-24 0737ET

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