3M Stock Is Higher Despite Its Dividend Cut. Here's Why

artist rendition of 3M headquarters — (Image credit: AaronP/Bauer-Griffin/GC Images)

3M (MMM) stock gained nearly 5% Tuesday and is up another 3% Wednesday, making one of the best-performing best Dow Jones stocks so far this week. The upside comes as the Post-It note maker's first-quarter earnings and revenue beat offset news that MMM is cutting its dividend, putting an end to its six-decade streak of increases.

In the three months ended March 31, 3M said revenue increased 0.5% year-over-year to $7.7 billion and earnings per share (EPS) were up 21.3% to $2.39.

The results exceeded analysts' expectations for revenue of $7.1 billion and EPS of $1.96, according to Yahoo Finance.

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The quarterly results were the last for outgoing CEO Mike Roman. In March, the company announced Roman will be replaced on May 1 by former L3Harris Technologies (LHX) CEO William Brown. Roman will become executive chairman of 3M's board.

3M cuts its dividend

On April 1, 3M completed the spinoff of its healthcare business, Solventum (SOLV). The company retains a 19.9% ownership stake the new business, which it will monetize over the next five years. However, as a result of the spinoff, 3M said it will reset its dividend payout ratio to approximately 40% of adjusted free cash flow. This will result in a cut to its shareholder payout.

The dividend cut had been anticipated by many firms, including CFRA Research.

"Despite the expected cash infusion from the Solventum spinoff, we believe that 3M is likely to cut its dividend over the next 12 months," said CFRA Research analyst Jonathan Sakraida in an April 16 research note. In addition, the company is facing upcoming litigation payouts related to "forever chemicals."

Investors will find out how deep the dividend cut will be next month, but speculation is already swirling.

"3M generally converts 100% of reported earnings to free cash flow," wrote Al Root, senior writer at Barron's, in an April 30 article. "That implies 2024 free cash flow, after the Solventum spin, of roughly $4 billion. Doing the math, 40% of that total is about $1.6 billion, or roughly $2.85 a share."

An annual dividend of $2.85 per share would be a 52.8% reduction from 3M's current annual rate of $6.04 per share.

Unfortunately, the dividend cut puts 3M at risk of losing its status as a Dividend Aristocrat, the best dividend stocks in the S&P 500 that have consistently raised their annual payouts for 25 straight years.

According to 3M, it has raised its annual dividend for 64 consecutive years and has paid a dividend for the past 100.

Where does 3M stand with analysts?

Analysts are mixed on the multinational conglomerate. According to S&P Global Market Intelligence, the consensus analyst target price for the blue chip stock is $101.24, representing implied upside of just nearly 2% to current levels. Additionally, the consensus recommendation is a Hold.

Argus Research analyst John Eade is one of those with a Hold rating on 3M stock. "The company is now taking aggressive steps to engineer an earnings and stock price turnaround," Eade says, including bringing on a new CEO and cutting its dividend to conserve cash. These are all good things, but "we expect that a return to industry leadership will take time and will look for top-line progress as a potential buying signal," he adds.

Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.