3M Stock Has Secure Dividends and Ample Cash Flow

Dividend Stocks

Despite what critics have said of late, 3M (NYSE:MMM) is actually a very solid and safe company for investors. MMM stock has at least 45% upside from current prices based on its dividend-paying track record and solid cash flow.

mmm stock

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The company has been in the news lately due to its production of masks and other products used to fight the novel coronavirus. The company faced criticism from the President and others for exporting some of its N95 respirator masks. It got to the point where the Wall Street Journal felt the need to step in, writing in an editorial that 3M aren’t villains here.

MMM Stock Dividend Is Secure

Value investors have learned to catch stock bargains when a company has trouble that is temporary in nature. MMM stock really seems to be in one of those temporary binds.

For example, last year 3M generated $7.07 billion in cash flow from operations (CFFO). It spent just $1.7 billion in capex. So its free cash flow, available to be spent on dividends, was $5.37 billion.

But here’s the thing. 3M’s dividend, currently at $5.88 per share (dividend yield is 4%), costs the company just $3.32 billion annually. So the company, based on last year’s cash flow, can absorb a big hit to earnings and still afford the dividend. In fact, CFFO would have to fall by as much as $2 billion, or 38% before the dividend literally could not be covered by existing FCF.

Moreover, this assumes that 3M’s capex will stay at the same level. But the company has already indicated it will cut operating costs. In January the company said it was eliminating 1,500 jobs as part of an ongoing restructuring. This will save the company a further $120 million, according to the Wall Street Journal.

So despite the likelihood that its revenue, earnings and cash flow will be lower this quarter, investors need not worry that the company won’t pay its regular quarterly dividend.

MMM Stock Is Worth 45% More Based On Its Historical Dividend Yield

On Feb. 4, 3M raised its annual dividend for the 62nd consecutive year. The quarterly dividend is now $1.47 per share or $5.88 on an annualized basis. At today’s price of $146.66 per share, that gives MMM stock a dividend yield of 4%.

But, according to Seeking Alpha, the average dividend yield for the past four years for 3M has been 2.75%. One way to value MMM stock is to divide the regular dividend by its historical dividend yield. In this case, $5.88 in dividends per share divided by 2.75% equals $213.82 per share. That means that MMM stock is worth at least $67.16 more than today’s price, or 45.8%.

Moreover, this assumes that the company will not only keep on paying the same dividend but that it will revert to its average historical yield. Remember that an average means the price will sometimes be higher than the target price, giving MMM stock an even lower yield at points.

There is no guarantee that this will occur anytime soon. Certainly, it will probably take a while until the U.S. and global economy return to their normal growth trajectories.

Nevertheless, looking at MMM stock from a value investing standpoint, despite the company being out of favor, 3M stock looks like a bargain.

What To Do Next With MMM Stock

Back in February, analyst Scott Davis of Melius Research upgraded MMM stock to the equivalent of a “Buy” recommendation. He set his price target at $205 per share, just a little below my $213 valuation. Other analysts weren’t as ebullient over MMM stock. Their main concern in the company’s potential liabilities regarding PFAS-related lawsuits. PFAS stands for “per- and poly-fluoroalkyl substances.”

The Nov. 2019 movie “Dark Waters” recently chronicled a 15-year legal saga which ultimately led to a class-action lawsuit against DuPont (NYSE:DD) over PFAS. CNBC reported late last year that 3M could also face significant risks over PFAS. Barron’s says the PFAS issue has kept other analysts away from 3M stock.

So a lone analyst is recommending a “Buy” for 3M when other sell-side analysts are saying “Hold.” I have a pretty strict rule. Do the opposite of what sell-side analysts recommend. So I like Mr. Davis’s call on MMM stock.

3M is scheduled to report earnings and its upcoming dividend at the end of this month. The stock is likely to take a hit after expected lower earnings come out. That might be a good time to take another look at the stock.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

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