On February 7, 3M (MMM) announced a dividend of $1.18 per share for 1Q17 on the company’s outstanding common stock. The dividend will be payable on March 12, 2017, to shareholders with a record date of February 17, 2017. 3M’s industrial peers General Electric (GE), Honeywell (HON), and United Technologies (UTX) declared a dividend per share of $0.24, $0.67, and $0.66, respectively, for 1Q17.
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Assuming that the quarterly dividend rate of $1.18 per share will be paid in the remaining quarters in 2017, 3M will be paying a dividend of $4.7 per share for 2017—an ~6% increase compared to the dividend of $4.40 per share in 2016. With this increase, 3M increased its annual dividend for the 59th consecutive year. 3M has been paying a dividend for the past 100 years.
For investors, it’s important to know whether the company is generating enough free cash flow to sustain the dividend growth. Dividends are usually paid out of free cash flows. For our analysis, we’ll consider 3M’s free cash flow and convert it into free cash flow per share.
Since 2011, 3M’s free cash flow per share has grown at a CAGR (compound annual growth rate) of 9.4% as of the end of 2016—lower than 3M’s dividend growth of 15.1% during the same period. It isn’t an ideal situation for 3M. In the long run, high dividend growth is hard to sustain with relatively lower free cash flow growth. The free cash flow will be channeled more towards dividend payment. There will be less for 3M’s future business growth.
Notably, investors can indirectly hold 3M by investing in the SPDR Dow Jones Industrial Average ETF (DIA). DIA invested 6.1% of its portfolio in 3M as of March 7, 2017.
In the next part, we’ll look at 3M’s dividend payout and the current dividend yield.