Once a Dividend King, 3M (NYSE: MMM) has cut its dividend. There are a number of reasons for the move, but there’s one factor investors should pay particular attention to. Here’s why dividend investors should be worried by the depth of 3M’s payout cut.
A brief overview of 3M’s troubles
The company has been facing material legal and regulatory headwinds over the last decade or so. One issue is related to the efficacy of earplugs the company sold to the U.S. military. Another relates to the company’s production and use of so-called forever chemicals.
These are not small or easy issues that can be quickly addressed. In fact, 3M has spent billions of dollars to resolve the problems, and it is still ongoing.
The costs have been so high that management needed to get creative to find a way to address the expense. The decision was to spin off the company’s healthcare division in early 2024.
That division is now a separate entity known as Solventum (NYSE: SOLV). The problem is that this segment was expected to be a growth engine for 3M, so management was basically forced to sell off the crown jewels to come up with the money it needed.
A look at 3M’s dividend cut
After the spinoff, 3M reduced its dividend. That makes complete sense, given that it jettisoned an entire division and the revenue and earnings that it produced. The quarterly payout was cut from $1.51 per share to $0.70, a reduction of a little more than 50%. The dividend yield today is around 2.8%.
The industrial company’s yield is notably above the 1.5% of Industrial Select Sector SPDR ETF (NYSEMKT: XLI). From that perspective, it continues to look like an attractive income stock. But the healthcare division accounted for around 25% or so of the top line. So the dividend cut of over 50% is way out of line with the size of the business that was spun off.
The question that dividend investors need to ask here is why make so large a cut? The most likely answer is that 3M’s legal and regulatory costs are going to be huge and linger for a long time.
To give itself the financial leeway to deal with those headwinds, it looked at the spinoff as an opportunity to hit the reset button. That’s the right move for the company, but it probably changes the equation for most income investors, and not in a positive way.
In short, 3M is not the same company it was before the spinoff, and it still has massive legal and regulatory issues to deal with. Higher costs and slower growth are basically what investors should go in expecting here.
Expect 3M to get back to dividend growth
3M will probably start to increase its dividend, at least by a token amount, fairly quickly. That’s likely one of the reasons the cut was so deep.
But should a small dividend increase come to pass in the next year or so, investors shouldn’t take that as a sign of strength. Without healthcare, 3M is highly likely to grow more slowly. And while it has raised much needed cash via the spinoff, it is still muddling through its legal and regulatory headwinds.
A dividend increase won’t change these facts, and it’s likely that only more aggressive investors should be looking at 3M today.
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Reuben Gregg Brewer has positions in 3M and Solventum. The Motley Fool recommends 3M and Solventum. The Motley Fool has a disclosure policy.
Here’s Why 3M’s Dividend Reset Should Turn Off Most Income Investors was originally published by The Motley Fool
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