This Former Dividend King Has Doubled in Just 6 Months. Is It Just Getting Started?

Dividend Kings are an elite group of companies. These are stocks that pay a dividend, but have increased the payout for 50 years or more. Of the thousands of companies trading on the market, only 54 stocks currently make the cut to be considered dividend royalty.

While dividend growth investing is one of the best ways to accumulate a sizable retirement nest egg, just because a company has a long track record of hiking its dividend is not enough of a reason to buy its stock. An investor still needs to do their due diligence.

Data from Hartford Funds and Ned Davis Research show stocks that initiate a dividend and grow it over time outperform all other stocks. Over the 50-year period between 1973 and 2023, dividend growers returned 10.2% annually versus 4.3% for those that did not pay a dividend. Equally important, they did so at lower risk.

While that suggests Dividend Kings should be good long-term investments, you can’t just blindly buy their stocks without looking closer at their business.

Losing their crown

In just the past year or so, three former Kings slashed their dividends because of deteriorating financials. Pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA), mattress coil spring maker Leggett & Platt (NYSE:LEG), and apparel company VF Corp (NYSE:VFC) all cut their payouts, sometimes by 80% or more. Walgreens suspended its dividend altogether just last month.

Dividend cuts can be a death knell for a stock, and shares of all three companies tumbled when they announced their cuts. Yet because it allows for a business to get back on its feet, the company also has the chance to launch a comeback.

3M (NYSE:MMM) is a fourth Dividend King that hacked its payout in half last year. But it also sparked a remarkable recovery. MMM stock is up 101% over the last six months, an incredible turnaround. But is it sustainable?

Reorganizing its business

3M had a 66-year history of raising its dividend, but with mounting legal liabilities potentially running into the billions of dollars, the industrial conglomerate’s free cash flow came under pressure leaving little left for dividends.

Increases in the payout got miserly, too, with 3M raising it only a penny or two at a time. That meant investors actually received less than they had previously due to the effects of inflation. The conglomerate slashed the dividend by 54%.

Yet 3M said it was committed to still paying a dividend, noting paying “a competitive dividend has been a priority for 3M for more than 100 years. This will continue to be true.” It also spun off its healthcare unit into Solventum (NYSE:SOLV) and reset its payout to 40% of adjusted FCF compared to 60% before the spinoff.

The realignment of priorities is having the desired effect.

Headed in a new direction

First, 3M has a new CEO. Bill Brown is focusing on “reinvigorating the 3M innovation machine,” which the company has faced criticism for due to a decade-long slump in new product introductions.

Brown is also focusing on sustained organic revenue growth, operational performance, and product innovation. By 3M’s fourth quarter, the company launched 169 new products in 2024, a 32% increase year-over-year. It is also streamlining inventory, getting down to 94 inventory days in Q4 from 102 in Q3, and marching towards its goal of 75 days.

The company is cutting costs, too, and was able to boost adjusted operating margins by 250 to 275 basis points for 2024. 3M’s cash position is stronger, too, with over $7.7 billion in cash, equivalents, and short-term investments compared to $5.8 billion in 2023. Adjusted free cash flow conversion hit 111% in 2024 and management is guiding toward around 100% in 2025.

While 3M still faces some significant legal liabilities related to so-called “forever chemicals” lawsuits, the company will cease producing such chemicals this year and has made strides in settling a number of legal claims against it. The market has largely priced-in the potential damage these liabilities can cause.

Still ready to roar?

At 18 times next year’s earnings estimates, MMM stock seems reasonably priced, but it still trades at 3 times sales, well above the industry average of 0.6 times. While Wall Street has a consensus buy rating on the stock, they also have a one-year price target of around $149 a share, indicating it sits about 4% higher than what they forecast.

3M is still in turnaround mode, but having come so far so fast, the industrial conglomerate may be ready to pause to allow its business to catch up to its valuation.

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