3M (NYSE: MMM), an industrial giant, has long been a favorite among dividend investors, and rightly so. It's a highly cash-generative company with a stable of world-class brands across many end markets including healthcare, transportation, consumer, electronics, and the industrial sector. As such, investors rarely doubt the viability of its dividend, which is currently yielding 5.7%. However, is it time to change that view in light of the company's challenges?
First, let's crunch some numbers. 3M's current dividend is $6 a share, and its cash dividend paid out last year was $3.4 billion. Turning to how well its free cash flow (FCF) covers its dividend, 3M's management gives a figure of $4.7 billion for its adjusted FCF in 2022, and is guiding toward adjusted FCF equivalent to 90%-100% of net income in 2023.
However, 3M's adjusted FCF in 2022 was adjusted for "Net costs for significant litigation after-tax payment impacts." Given 3M's significant legal issues and the potential for ongoing issues, it's prudent for investors not to exclude them. Following that approach leads to an FCF figure of just $3.8 billion in 2022. It's an approach that Wall Street analysts favor, and the current consensus is for FCF of $4.3 billion in 2023, $5 billion in 2024, and $5.7 billion in 2025. Based on these figures, the current dividend-to-FCF ratio is 79% in 2023, 68% in 2024, and 60%.
Source Fool.com