It's been a while, but 3M (MMM 1.98%) finally and formally cut its dividend recently, approving a dividend of $0.70 for the second quarter, down from the previous quarterly payment of $1.51. Annualizing the dividend means $2.80 per share for the full year, implying a dividend yield of 2.8% using Wednesday's closing price.
3M's dividend cut
It was no secret that 3M would cut its dividend since management had told investors it intended to pay 40% of its adjusted free cash flow (FCF) in dividends this year. As such, investors already know the dividend-to-FCF ratio: 40%.
As for the dividend-to-net income ratio, management expects earnings per share of $6.80 to $7.30 (excluding the now spun-off business Solventum), implying a dividend-to-net income payout ratio of 40% at the midpoint of guidance.
That ratio may appear to give 3M some leeway to grow its dividend, but remember that it has multibillion-dollar and multiyear legal settlements to pay, and the "new" 3M is fundamentally a cyclical business now that the more stable healthcare business, Solventum, is no longer attached.
Speaking of Solventum, it's worth noting that 3M left that company with debt. Its immediate priority is paying down that debt, which means no dividend to shareholders for the time being.
Can 3M grow its dividend?
If management pays 40% of its FCF in dividends, then 3M can grow its dividend as FCF grows. That said, some caution is needed. As noted earlier, there are multiyear legal settlements to make, and 3M's revenue growth and margin performance have been mediocre over the last decade.
There is a good case for buying the stock as a value play. Still, it's not based on the dividend but on the possibility that new CEO Willam Brown will add some strategic vision to a restructuring plan that already appears to be progressing.
