Thursday, March 20, 2008

3M dividend analysis

3M Company, together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security, and Protection Services; and Electro and Communications.

It is a dividend aristocrat as well as a major component of the S&P 500 and Dow Jones Industrials indexes. Over the past 10 years this dividend growth stock has delivered an annual average total return of 11.20% to its shareholders. The company has managed to deliver an impressive 17.90% average annual increase in its EPS through organic growth and share buybacks. Management has consistently bought back 1.2% of outstanding shares each year for the past 10 years, spending a little over $9.9 billion in the process.

The ROE has been increasing steadily over our study period, rising from a low of 20% in 1998 to 35% by 2007.

Annual dividend payments have increased over the past 10 years by an average of 6.20% annually, which is significantly below the growth in EPS. The company is moving aggressively into growth markets and has been fairly active on the acquisition front, which explains the relatively low dividend growth rate. A 6 % growth in dividends translates into the dividend payment doubling every 12 years. If we look at historical data, going as far back as 1970, MMM has actually managed to double its dividend payments on average every eight and a half years.

If we invested $100,000 in MMM on December 31, 1997 we would have bought 2437 shares (Adjusted for 2:1 stock split in September 2003). Your first quarterly dividend check would have been $670.17 in February 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $1455.84 by November 2007. For a period of 10 years, your quarterly dividend payment has increased by 75 %. If you reinvested it though, your quarterly dividend income would have increased by 128%.

The dividend payout has been in a downtrend over the past 10 years, falling from 76% in 1998 to 34% in 2007. Normally this is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. In 3M’s case cash is being invested in new business ventures which could provide nice payoffs for shareholders if executed properly. 3M is the ultimate dividend aristocrat but also growth stock.

I think that MMM is attractively valued with its low price/earnings multiple of 14 and above-average yield at 2.50%.
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