3M's stock surges to 16-month high after dividend cut was less than feared

By Tomi Kilgore

The dividend payout implies a free-cash-flow outlook that is higher than expected

Shares of 3M Co. surged toward a 16-month high Wednesday, after the consumer and industrial products company slashed its quarterly dividend, but by less than what was expected.

The company's (MMM) dividend cut came in the wake of the spinoff of its healthcare business, Solventum Corp. (SOLV), which was completed on April 1. While the cut snapped a 64-year streak of increases, J.P. Morgan analyst Stephen Tusa expressed "relief" that it wasn't cut even more.

The stock, which had traded lower in the premarket, climbed 1.3% in midday trading. It was headed for the highest close since Jan. 23, 2023.

3M, which makes Post-it Notes, Scotch tape and Command strips, declared late Tuesday a second-quarter dividend of 70 cents a share. Shareholders of record on May 24 will be paid the dividend on June 12.

"3M has paid dividends to its shareholders without interruption for more than 100 years," the company said.

The last quarterly dividend the company declared was $1.51 a share.

Based on current share prices, the new implied dividend yield is 2.76%, which compares with the implied yield for the S&P 500 index SPX of 1.39%.

The previous dividend would have implied a yield of 5.96%.

With 553.36 million shares outstanding as of March 31, the new annual dividend rate of $2.80 a share equates to a total annual payout of about $1.55 billion. J.P. Morgan's Tusa said that's more than the $1.4 billion payout he had expected.

Tusa said the dividend announcement, which has been an overhang for the stock, was "a relief," at the least because "this particular shoe won't drop any further."

In the company's first-quarter report released April 30, the company had said that following the Solventum spinoff, the dividend payout ratio was expected to be about 40% of adjusted free cash flow.

If $1.55 billion is 40%, then full-year adjusted free cash flow would be about $3.87 billion. That compares with the current FactSet consensus for free cash flow of $3.28 billion.

"We had been concerned that given the company had yet to give hard targets for FCF, the dividend would be cut more to account for potential weakness this year," Tusa wrote in a note to clients.

Keep in mind that the FactSet FCF consensus had dropped sharply in the past couple of weeks, from $4.08 billion at the end of April.

3M's stock has gained 10.9% year to date, while the S&P 500 has advanced 10.9%. The Dow Jones Industrial Average DJIA, of which 3M is a component, has tacked on 5.6% this year.

-Tomi Kilgore

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05-15-24 1143ET

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