3M's Dividend Cut Signals Shift in Investor Strategy: What Does It Mean for Shareholders?

With a $56.02 billion market cap, 3M Company (MMM) offers diversified technology services, focusing on consumer goods, safety and industrial, healthcare, and transportation sectors. On May 14, MMM declared a dividend on the company’s common stock of $0.70 per share for the second quarter of 2024, payable on June 12. 

The company has paid dividends to its shareholders without interruption for more than 100 years. However, the newly declared dividend is down from the previous quarter’s dividend of $1.51, and this dividend cut will end a 64-year streak of increases.

Let's delve into the implications of 3M’s significant dividend reduction for investors, examining the reasons behind this decision and its effects on shareholder value.

3M Spun-Off Its Healthcare Business

In April, MMM successfully completed the planned spin-off of its healthcare division, which formally launched Solventum Corporation as an independent company. Solventum is now publicly traded on the New York Stock Exchange under the ticker symbol SOLV.

“This is an important day for 3M and Solventum, and I extend my sincere congratulations to members of both teams who have made this possible,” said Mike Roman, 3M chairman and CEO. “Both companies are positioned to pursue their respective growth and tailored capital allocation plans, and I am excited to see both companies succeed as they innovate new solutions and create value for their respective stakeholders.”

Given the spin-off of its healthcare business, 3M’s recent dividend cut was not surprising. The launch of Solventum as an independent entity impacted MMM’s financial landscape, as the healthcare segment accounted for nearly 30% of the company’s free cash flow.

Now, the consumer and industrial products company is aiming for a dividend payout ratio of approximately 40% of adjusted free cash flow compared to about 60% before the Solventum spin-off.

MMM’s annual dividend of $2.80 translates to a yield of 5.05% at the prevailing share price. Its four-year average dividend yield is 3.75%.

Lost Dividend Aristocrat Status

The recent dividend reduction will cause 3M to lose its status as a Dividend Aristocrat, a company that has increased its dividend payouts for at least 25 consecutive years. Once 3M is removed, the S&P 500 Dividend Aristocrat Index will consist of 66 components.

S&P Global reviews the index qualification once per year in January, suggesting that 3M stock might remain in the index until early 2025.

The removal from the index is not expected to impact the stock significantly. Former 3M CEO Mike Roman had already informed investors about resetting the company’s dividend post the April 1 spinoff.

3M’s stock soared toward a 16-month high on Wednesday after the company cut its quarterly dividend but by less than what was anticipated.

J.P. Morgan analyst Stephen Tusa expressed “relief” that the dividend wasn’t slashed even more. With 553.36 million shares outstanding as of March 31, the new annual dividend rate of $2.80 per share translates to a total annual payout of approximately $1.55 billion. Tusa noted that this payout is higher than the expected $1.4 billion.

While the dividend cut may initially impact investor sentiment and income, the broader market’s reaction suggests that it has anticipated and priced this adjustment due to 3M’s spin-off of its massive healthcare business, Solventum.

Investors should monitor the company’s financial reports, strategic moves, and efforts to address underlying challenges, which could ultimately shape the trajectory of shareholder value in the upcoming quarters.

First-Quarter Results and Updated Full-Year 2024 Guidance Reflecting Completion of Solventum Spin

For the first quarter that ended March 31, 2024, MMM’s revenue of $8 billion surpassed analysts’ estimate of $7.66 billion. Its organic sales grew 0.8% year-over-year, marking the first positive growth in the past five quarters. Its adjusted operating income margin was 21.9%, up four percentage points year-over-year.

The company posted adjusted earnings per share of $2.39, compared to the consensus estimate of $2.11, and up 21% year-over-year. During the quarter, 3M’s adjusted free cash flow was $0.8 billion. Moreover, the company returned $835 million to shareholders via dividends.

Furthermore, as of March 31, 2024, the materials company’s cash and cash equivalents stood at $10.91 billion, compared to $5.93 billion as of December 31, 2023. The company’s total current assets were $21.61 billion versus $16.38 billion as of December 31, 2023.

Starting in the second quarter of 2024, Solventum’s historical earnings results will be reported within 3M’s financial statements as discontinued operations.

According to the full-year 2024 outlook, the company projects adjusted organic sales growth to be flat-2%. Also, its adjusted earnings per share is expected to be between $6.80 to $7.30.

Strategic Initiatives and Legal Settlements

On May 3, 3M announced a 90,000-square-foot expansion at its facility in Valley, Nebraska, boosting the plant’s manufacturing capacity and adding around 40 new jobs. The $67 million investment includes new production lines, equipment, and a warehouse, enabling 3M to meet customer demand for its personal safety products more efficiently.

In addition, MMM is making changes in its leadership structure. On March 12, the company announced the appointment of William M. “Bill” Brown as chief executive officer, effective May 1, 2024. He succeeded Michael Roman, who was appointed to the role of Executive Chairman of the 3M Board of Directors, also effective May 1.

“Bill's strong track record as a CEO for a global technology company makes him the right leader for 3M,” said Michael Roman. “He brings a wealth of experience in strategic leadership, innovation, and operational excellence to 3M. I look forward to working with him to build on our momentum in my new role as executive chairman.”

Further, 3M has faced substantial lawsuits, but they are beginning to resolve these issues. On April 1, 3M’s previously announced settlement with U.S.-based public water suppliers (PWS) to address PFAS in drinking water received final court approval.

This marks another significant development for 3M as it remains committed to its objectives. The final approval of this settlement and the company’s ongoing progress to cease all PFAS manufacturing by the end of 2025 will further its efforts to minimize risk and uncertainty in the future.

The company also settled the Combat Arms Earplug litigation. More than 99% of claimants have signed on at the last registration date, marking a significant stride in resolving this long-running dispute.

Bottom Line

MMM delivered better-than-expected first-quarter 2024 results as it returned to organic sales growth and achieved doubt-digit growth in adjusted earnings. The company enhanced performance in its businesses through effective operation management, successfully executed the Solventum spin-off, and finalized two major legal settlements.

The significant progress 3M has made in executing its strategic priorities set the stage for long-term value creation for shareholders, particularly as Bill Brown assumes the role of the CEO.

The recent dividend cut by 3M, following the spin-off of its healthcare division Solventum, was largely anticipated by investors and analysts as part of its broader strategic realignment. While the cut ended a streak of 64 straight years of increases, it was less than feared; 3 M’s stock is trading higher.

Moreover, the stock has surged nearly 3% over the past five days and more than 8% over the past month.

Analysts at J.P. Morgan upgraded 3M to Overweight from Neutral and raised its price target on the stock from $110 to $111.

The upgrade reflects “a combination of an attractive valuation, an increasingly cleaned up balance sheet, with the dividend cut catalyst behind them now, and a turn in earnings momentum on a bottom in electronics, with better visibility on remainco fundamentals,” Stephen Tusa said in a note to clients.

Moving forward, investors should closely monitor 3M's financial performance, execution of strategic plans, and ability to capitalize on growth opportunities. The company’s trajectory in addressing underlying challenges and creating long-term shareholder value will be the key factors influencing investor sentiment and decision-making in the upcoming quarters.