has raised its dividend for 64 consecutive years, but with the recent spinoff of its healthcare business, its status as a Dividend Aristocrat could be coming to an end.
Dividend Aristocrats are companies that have raised their payouts for at least 25 consecutive years. There are 67 stocks in the S&P 500 U.S. Dividend Aristocrats index, including 3M, which paid out $6 a share to investors in 2023. In 1998, it paid out $1.10.
It’s unclear whether 3M can continue to raise its dividend. On April 1, it spun off its healthcare business, now known as
and for it to maintain its Aristocrat status, the combined payout will have to be more than $6 a share, or some $3.4 billion. (S&P Global—itself an Aristocrat—looks at the combined payouts of both companies for a couple of years post-spin.)
Don’t expect Solventum to contribute much. 3M received almost $8 billion from the spin, and Solventum’s balance sheet was the relative loser in the transaction. The company starts life with about $8.4 billion in debt and $2.2 billion of Ebitda, short for earnings before interest, taxes, depreciation, and amortization. Including cash, that leaves it with a Debt-to-Ebitda ratio of 3.5 times, writes Imperial Capital analyst Michael Piccolo—more than double the 1.6 times for the average dividend payer in the S&P 500.
Elevated financial leverage is one reason Solventum management hasn’t said what its dividend policy will be, though CEO Bryan Hanson, at a March investor event, said paying down debt to increase financial flexibility was a priority.
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3M will have to pick up the slack if its status as an Aristocrat is to be maintained. The market doesn’t appear optimistic. 3M stock is yielding 6.5%, the highest yield among the Aristocrats, which averages 2.4%, excluding 3M. For the yield to get to 5%—the average of the top-yielding stocks in the S&P 500—its stock would have to trade at $120, up more than 25% from recent levels. Investors seem to be expecting a cut.
Of course, 3M could try to make the dividend math work. When asked about dividends at a March investor conference, CEO Mike Roman stopped short of committing to a higher payout, but said that the Solventum spin strengthened 3M’s balance sheet, emphasizing that an attractive dividend is a priority for his company. 3M has about $10 billion in debt less cash and is expected to generate 2024 Ebitda of $8.7 billion.
3M also generates solid free cash flow—$4.5 billion is expected in both 2024 and 2025—thanks, in part, to the power of its Post-it Notes franchise. The business can support a higher payout, but it will require about three-quarters of projected free cash flow, above the 50% payout of the average S&P 500 dividend payer, leaving little cushion for other spending.
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And 3M might need that cushion. It has exposure to so-called forever chemicals found in groundwater and legal liabilities from potentially faulty earplugs sold to the U.S. military have eroded balance sheet strength. So far, 3M faces payouts of roughly $19 billion, with the healthcare spin providing more than half of that. Financing the balance not covered by the Solventum spin could represent $500 million in interest out the door each year, which would squeeze free cash flow coverage of the dividend even further.
3M management faces some tough choices. So do investors. It might not feel comfortable, but buying the stock before a potential dividend cut is probably the way to go. It often works out even better than expected.
effectively cut its dividend after spinning out what is now
on March 25, 2022, and the stock was up about 17% three months later.
Perhaps 3M can cut its dividend and have its stock gain, too—even if it means sacrificing its Aristocrat status.
Write to Al Root at allen.root@dowjones.com