The S&P 500 index has outperformed the likes of Microsoft (NASDAQ: MSFT), International Business Machines (NYSE: IBM), Intel (NASDAQ: INTC), and Cisco (NASDAQ: CSCO) over the last month.
Some investors have taken refuge in dividend stocks. But should you have to sacrifice growth for income?
3M Co: A Top Dividend Growth Stock
Shares of 3M Co (NYSE:MMM) have outperformed the S&P 500 by 75% over the last month. In fact, in each of the last two years, 3M has beat the S&P 500 index by over 50%.
Then there’s the income aspect. 3M offers a 2.4% dividend yield. That’s better than you’ll get with the S&P 500, which yields 1.9%. 3M has also increased its annual dividend payment for 55 consecutive years.
3M is a somewhat overlooked and often misunderstood dividend growth stock.
Many investors probably consider 3M a consumer products company, because it’s known for such brands as Post-it and Scotch. However, it’s actually much more of a technology company.
Its key job is to invent new products. It has a strong research and development department made up of innovators and scientists that create products across several industries, not just consumer goods. The other major industries that 3M operates within includes industrial, safety and graphics, electronics, energy, and healthcare.
3M’s balance sheet is fairly strong. It has a debt to equity ratio that’s 37%. It also generates high levels of free cash flow, which helps support its share buybacks and dividends.
The company’s long-term target includes growing earnings by 10% annually. And with the company’s superior ability to convert nearly 100% of its earnings into free cash flow, that’s a steady stream of cash flow 3M can return to shareholders.
Earlier this year 3M upped its annual dividend by 35%. Its current dividend is only a 45% payout of earnings. But it also boosted its share repurchase program to between $17 billion and $22 billion. On the low end, that’s 18% of its shares outstanding.
The company’s return on invested capital remains an impressive 20%. That’s especially impressive for a company with a market capitalization of $90 billion. 3M’s long-term goal is to keep its return on invested capital above 20%. Looking across the major industrial goods companies, 3M’s return on invested capital actually towers above its major peers, including General Electric (NYSE: GE), Honeywell (NYSE: HON), and United Technologies (NYSE: UTX).
This dividend growth stock is also one of the best ways to gain access to international markets.
Over $20 billion of its $31 billion in sales is generated from outside the United States. It plans on further penetrating China to help boost sales from international markets to $27 billion. That’s revenue growth of 28.5% in less than three years.
The other nice thing about 3M’s international revenues is that they aren’t heavily concentrated in one area. They are fairly spread out. The U.S. generates some 36% of revenues; Asia/Pacific 29%; Europe, the Middle East, and Africa 23%; and Latin America/Canada 12%. Compare that to General Electric and Honeywell, which only get 47% and 58% from international markets, respectively.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.