The history of 60 successive years of dividend growth makes 3M (NYSE:MMM) the best stock for dividend growth investors. With a presence in more than 100 countries, the diversified industrial company has recently raised its quarterly dividend at a staggering rate of 16% to $1.36 a share.
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Despite several success stories, MMM stock price tumbled 20% since it hit its all-time high of $260 a share at the beginning of the year. Economic instability, trade war, and the rate hike are primary factors for the downside volatility in its share price. The lower than expected financial outlook for this year is adding to traders concerns.
The price target downgrade from Jefferies also indicates that economic environment hinders 3M’s growth strategies. “We see less room for multiple expansion in a rising rate environment, and once recession risk moves to dominate the investor debate the forward P/E multiple likely compresses,” Jefferies analyst Laurence Alexander said in a research note. “
Are Dividends Safe?
It’s true that business model of diversified industrial companies is correlated to the economic environment, 3M’s extensive global footprints and product portfolio diversification helps it in offsetting negative performance from any region or any product.
While the company has lowered its higher end of earnings outlook from $10.70 a share to $10.50 a share, traders do not see the enormous impact on its cash generation potential.
Its free cash flows were standing around $4 billion in the trailing twelve months compared to dividend payments around $3 billion. The huge gap in free cash flows and dividend payment creates room for the company to increase its dividends at healthy rate albeit lower than expected growth in earnings. The dividends also appear safe considering its payout ratio based on the income of 50%, meaning that the company is paying only 50% its profits in dividends.
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