3M Company (NYSE:MMM) is growing its FCF very well, and as a result, MMM stock is likely to move up at least 44% over the next or so.
Right now 3M pays a dividend of $5.88 per share, which is well covered by its free cash flow, as I mentioned in a recent article. Moreover, this represents about a 4% dividend yield, but the stock has had a lower average dividend yield of just 2.78% over the past four years.
Using a dividend yield model, if we divide the present dividend per share of $5.88 by its average yield of 2.78%, we derive a target price of $211.51 per share.
That represents a potential upside of 44.4%. It assumes that over time the market will revalue the stock to its previous valuation on a dividend yield basis as confidence in the continued dividend entices investors to bid up the stock.
Dividend Payments and MMM Stock
Last quarter (ending March 31) 3M produced $881 million in FCF, which was more than enough to cover the $847 million dividend cost. Moreover, in the year ending March 31, 3M generated $5.595 billion in FCF, but its dividend cost was $3.333 billion leaving $2.262 billion in surplus FCF after dividends. 3M used that money to buy back shares worth $1.07 billion.
I believe that once the market sees that there is surplus FCF generation the dividend yield will lower closer to the 2.78% average dividend yield of the past four years.
Recently the Ontario Teachers’ Pension Plan, a large and renowned pension fund, took an increased stake in MMM stock, indicating that it also believes in #ms sustainable dividend.
What the Street likes is that the company reported good earnings. According to Seeking Alpha, the company reported higher than expected earnings and revenue for Q1.
Moreover, the company’s free cash flow over the past year ending March represents an FCF yield of 6.64%. Much of the company’s success in the past quarter was from its Health Care and Health & Safety divisions. These account for over 50% of the company’s total sales.
3M is preserving its excess FCF. The company decided to suspend share buybacks but kept its dividend level, in addition to cutting capital spending by $17.6% to just $1.3 billion for 2020.
Analysts expect an earnings increase of over 10% by 2021 to $8.90 per share. That means that MMM stock trades on a forward price-to-earnings ratio of just 16.5 times for 2021 earnings. That seems relatively cheap, especially for a stock with a 4% dividend yield.
What To Do With 3M tock
3M made it very clear in its earnings report and in its earnings slide presentation that the dividend was not going to be cut. For example, here is what the company said on page 8 of its slide presentation: “Remain committed to our dividend as a high priority for capital allocation”
Management reiterated this stance in its earnings call discussion on the dividend, saying “Our first priority is to invest in our business second, maintaining our dividend and lastly flexible deployment for M&A and share repurchases.”
This makes it very clear the 3M is here to stay. So, using the average dividend yield of the past four years, I estimate the stock is worth $211.55, or 44.4% higher than today.
So I believe MMM represents good value for the patient, long-term investor.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks.