My big plan in life is to become financially independent by 40 years old, living off of the dividend income my portfolio generates for me.
This dividend income, based on my projections, will be able to pay for my expenses by the time I’m 40 (seven years from now).
But here’s the kicker...
The stocks in my portfolio are high-quality dividend growth stocks.
[ad#Google Adsense 336×280-IA]That means the dividend income isn’t static.
In fact, it’s growing year after year.
Organically. Without me doing anything at all.
And it’s growing faster than the rate of inflation, meaning my purchasing power is actually increasing year after year.
And to ensure that this activity continues, I remain vigilant when it comes to buying the “best of the best”.
If you’re going to live off of growing dividend income, it’s in your best interest to make sure that stream of growing income keeps coming your way.
Well, what better way to ensure that it continues than by investing in companies with extremely lengthy track records of doing just that… of rewarding their shareholders with increasing dividends for decades?
3M Co. (MMM) is a shining example.
They’ve increased their dividend for the past 57 consecutive years.
That easily qualifies them as a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list.
If you think it’s unrealistic to expect growing dividends that you can live off for decades, all you need to do is look at 3M’s track record.
That 57-year streak, by the way, extends through all kinds of events that might take lesser companies down.
Think high inflation of the late 70s and early 80s. The financial crisis. The savings & loan crisis. Black Monday. The dot-com crash. Multiple wars. So on and so forth.
But 3M is able to continue growing their dividend through thick and thin because it’s an incredibly high-quality company.
First, what do they do?
They’re a diversified global industrial and technology company that manufactures an array of industrial products for a variety of end markets.
What does that mean?
Think of this way: They’re in almost everything.
They manufacture products that include adhesives, abrasives, filtration products, laminates, advanced ceramics, electronic materials, advanced films, thermal insulation, and protective wraps. Of course, the iconic Post-it notes are in there as well.
Investing in 3M means you’re investing in manufacturing at the global level, and in almost the most diversified way possible.
Moreover, a number of their products are regularly consumed and need to be replaced. This gives 3M a great source of recurring revenue.
But 3M is an absolute giant. They have operations in more than 70 countries, employ more than 89,000 people globally, and feature products sold in more than 200 countries around the world.
More than 100,000 patents have been issued to the company over the lifetime of the company’s operations, which speaks to their breadth and scope.
For fiscal year 2014, they operated in five segments: Industrial (34% of revenue), Safety & Graphics (18%), Healthcare (17%), Electronics & Energy (17%), and Consumer (14%).
And just so we understand how global this firm is, 63% of their sales last year were international.
So we see what they do. But what are they doing with all that? Let’s take a look at top-line and bottom-line growth over the last decade, which will tell us a lot about what we’re working with here and how much the business might be worth.
Revenue is up from $21.167 billion to $31.821 billion from fiscal years 2005 to 2014. That’s a compound annual growth rate of 4.63%.
Meanwhile, earnings per share is up from $4.12 to $7.49 over this period, which is a CAGR of 6.87%.
Nothing outstanding here, but I think there’s a lot to like for a firm that has a history dating back to 1902. It’s not all that often you’ll find a company still growing at almost 7% per annum more than 100 years later.
S&P Capital IQ anticipates that 3M will grow its EPS at an annual rate of 9% over the next three years. Significant share repurchases and new products are expected to aid.
In regards to repurchases, MMM reduced its outstanding share count by approximately 15% over the last decade, which helped propel excess bottom-line growth.
We’ve already discussed the incredible track record for dividend raises a bit, but let’s dive into that a little more.
Over the last decade, the company has increased its dividend at an annual rate of 9%.
And with a moderate payout ratio of 53.5%, there’s still plenty of room for future dividend raises more or less in line with EPS growth.
The stock yields 2.75% right now. That’s well above what you get with the broader market. It’s also quite a bit higher than the five-year average yield of 2.3% for MMM.
Looking at the balance sheet, we can see further evidence of quality. The company’s long-term debt/equity ratio of 0.51 is solid, but the interest coverage ratio, which sits above 50, is extremely high. 3M is extremely financially flexible.
Profitability is also robust. Over the last five years, 3M has averaged net margin of 15.06% and return on equity of 28.83%.
What we have here is a very diversified industrial company that oozes quality pretty much everywhere across the business.
With a forecast for high single-digit growth over the foreseeable future, an appealing yield, and an incredible track record for dividend growth, there just isn’t much to dislike here.
Overall, I view this stock as a low-risk investment. But currency risks and its exposure to the broader economy across the world should be considered.
With the quality we see here, it’s not surprising the stock trades hands for a P/E ratio of 19.44. Not out of line with the broader market, but that ratio is significantly higher than the P/E ratio of 16.8 the stock has averaged over the last five years. In addition, the price-to-book and price-to-sales metrics are both well above recent historical averages.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 7% long-term dividend growth rate. That growth rate is a bit higher than what I used the last time I looked at the stock, and it’s perhaps slightly aggressive considering the 10-year EPS growth. But the moderate payout ratio and forecast for profit growth moving forward means there still might be a mild margin of safety there. The DDM analysis gives me a fair value of $146.23. This stock appears roughly fairly valued.
Bottom line: 3M Co. (MMM) is a massively diverse industrial juggernaut that operates on a global scale. 57 consecutive years of dividend raises speaks for itself, and the company appears poised to continue growing their dividend at an attractive rate for the foreseeable future. If you’re looking to lock in an appealing yield and very strong odds of growing income for years to come, this stock should definitely be on your radar.
— Jason Fieber, Dividend Mantra
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