Why I Like This Blue Chip So Much (55th Dividend Increase Just Announced)
In the world of large-cap blue chips, the performance of so many mature, slow-growth corporations in the market is truly remarkable. Ever since the stock market bottom in March 2009, the place to be has been dividend-paying blue chips. While these stocks certainly can experience long periods of non-performance, the dividends add up—and they add up big-time when reinvested in new shares.
A component of the Dow Jones Industrial Average, 3M Company (MMM) is as mature an enterprise as they come. This stock has been doing very well on the equity market, even though its top- and bottom-line growth is anemic.
But in the marketplace for institutional money, 3M offers the “package”—its slight hope for improving earnings, three-percent top-line growth, a current dividend yield of 2.2%, and other positive balance sheet attributes. Dividends have been and will continue to be worth paying for.
From July of 2011 to the beginning of 2013, 3M did nothing on the equity market but pay its dividends. But like so many other blue chips, 3M just took off starting in January; so, in effect, the opportunity cost of owning this previously flat position was significant.
This is how so many blue chips trade. They don’t do anything but pay their dividends until market dynamics lift them higher. 3M’s stock chart is featured below:
Wall Street has been boosting 2013 and 2014 earnings estimates for many blue chips, including 3M. Part of the expectations is a pickup in the U.S. economy, which is highly unpredictable. In 3M’s case, the company is expected to grow its earnings by about six percent this year and 10% in 2014 (according to the Wall Street average).
For such a large, mature enterprise, combined with a very steady dividend, an investor should reasonably expect a high single-digit to low double-digit return on investment per year, assuming that there will be no return to a recession.
In June of this year, the company completed the sale of its Scientific Anglers and Ross Reels fishing equipment businesses to The Orvis Company Inc. 3M didn’t disclose financial details, but they were probably not significant enough to report.
The company’s industrial division experienced solid growth in the latest quarter. The company’s other operating divisions, including safety and graphics, electronics and energy, and healthcare and consumer products, were flat.
Currency impacts affected the company’s sales by 1.3% year-to-date. This was mostly due to a 20% weakening of the Japanese yen compared to the U.S. dollar. In the first half of this year, the company purchased approximately $2.0 billion worth of its own stock, compared to $1.16 billion in shares repurchased in the second quarter of 2012. (See “Strong Cash Flow, Increasing Dividends Make This Old Economy Stock Attractive.”)
Earlier this year, 3M boosted its annual dividend by 7.3%, representing its 55th consecutive year of increases. It’s highly likely the company will do something similar next year, which adds to the attractiveness of this blue chip business.
What I do expect is for the marketplace to continue bidding shares of safe, reliable, dividend paying stocks like 3M. The outlook for increased dividends continues to be very favorable.