Stock of 3M Surges to 16-month High After Dividend Cut is Less Than Expected

Shares of 3M Co. surged to a 16-month high on Wednesday after the company reduced its quarterly dividend, but not as much as anticipated.

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The dividend cut followed the spinoff of 3M’s healthcare business, Solventum Corp., completed on April 1. This cut ended a 64-year streak of dividend increases, yet J.P. Morgan analyst Stephen Tusa felt "relief" that the reduction wasn’t greater.

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Initially, the stock traded lower in premarket activity but climbed 1.3% by midday, aiming for its highest close since January 23, 2023.

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3M, known for products like Post-it Notes, Scotch tape, and Command strips, announced a second-quarter dividend of 70 cents per share late Tuesday. Shareholders on record as of May 24 will receive the dividend on June 12.

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“3M has paid dividends to its shareholders without interruption for more than 100 years,” the company stated.

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Previously, the quarterly dividend was $1.51 per share. With the current share prices, the new implied dividend yield is 2.76%, compared to the S&P 500 index’s implied yield of 1.39%. The old dividend implied a yield of 5.96%.

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With 553.36 million shares outstanding as of March 31, the new annual dividend rate of $2.80 per share translates to an annual payout of approximately $1.55 billion. J.P. Morgan’s Tusa noted that this payout exceeds his expected $1.4 billion.

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Tusa described the dividend announcement as a relief, noting that it alleviates concerns about further cuts.

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In the first-quarter report released on April 30, 3M indicated that following the Solventum spinoff, the dividend payout ratio was expected to be around 40% of adjusted free cash flow. If $1.55 billion represents 40%, the full-year adjusted free cash flow would be about $3.87 billion, surpassing the current FactSet consensus of $3.28 billion.

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“We had been concerned that given the company had yet to provide hard targets for free cash flow, the dividend would be cut more to account for potential weakness this year,” Tusa wrote in a client note.

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It’s important to note that the FactSet free cash flow consensus had significantly decreased in recent weeks, dropping from $4.08 billion at the end of April.

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3M’s stock has risen 10.9% year to date, mirroring the S&P 500's 10.9% gain. The Dow Jones Industrial Average, which includes 3M as a component, has increased by 5.6% this year.

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