Merrill’s latest investment rationale concluded:
In our view, the core issue is disruption from companywide ERP rollout, which is scheduled to continue for at least another year, and we see limited opportunity for near-term improvement.
According to Dividend.com, 3M’s dividend reliability shows that the payout ratio is healthy and that the company leaves ample room for reinvesting its earnings to grow.
3M has closed off its old pension plan to new hires about a decade ago, but it continues to have funding obligations due to investment return shortfalls and other issues. The 2018 annual report showed that 3M contributed $366 million to its total pension plans in 2018 and $964 million in 2017, but in 2019 it had planned to contribute between $100 million and $200 million. Future contributions would depend on market conditions and other factors.
There are other issues to consider on top of the recent Acelity acquisition (which shareholders have a right to question now). 3M’s latest earnings debacle was yet another share price killer. 3M also has made a pledge to convert all its energy usage to be sourced from clean and renewable sources in a move that will take years to realize.
If you add everything up, 3M’s current dividend and even a mild hike actually should be safe even beyond 2019 and 2020. That said, with rising recession risks and with its own recent uncertainties, it seems almost certain that 3M will have to focus on very small dividend hikes, based on the currently available information.
As for the safety of the future dividends and hikes under a recession scenario, a lot just depends on how severe the next recession will be and how 3M lines itself up ahead of that recession. If you take a more negative scenario in which 3M’s dividend liability ticks up, with higher debt servicing costs and with a continued downward earnings pressure rather than an earnings recovery, then 3M might find that it has to take more drastic measures to keep investors from worrying about its dividend payout. It looks rather difficult with the recent wave of earnings uncertainties to calculate how 3M might have to treat its dividend if the next recession is worse than expected, or if 3M has a harder time dealing with the next recession than its industrial peers.
The good news for 3M investors is that the shares recovered with the broader market in June. It was last seen up about 9% over the past month, but that was still down about 8% year to date.
3M recently traded at $174.50, and it has a market capitalization of $101 billion. Its 52-week trading range is $159.32 to $219.75 and the consensus target price from Refinitiv is $181.38. At the start of 2019, Refinitiv had a consensus analyst target of $203.94, which was lower than a year earlier when the target price was $223.08.