For decades, 3M (MMM) was a reliable favorite for income investors, delivering 66 consecutive years of dividend hikes—until last year’s cut. After spinning off Solventum (SOLV), management reset the payout to about 40% of adjusted free cash flow, freeing up cash to handle massive legal liabilities (PFAS and earplugs) and to steady the business. Execution has improved since, but the golden age of ever-rising dividends isn’t coming back anytime soon. Despite the stock trading with a marginal discount to the sector (20x forward P/E compared to 23.3 for the Industrial sector), my outlook remains Bearish.
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The Anatomy of MMM’s Dividend Cut
In case you need a reminder, last year’s spin of Solventum made 3M a smaller company overnight, which forced a recalibration of capital returns. In late April 2024, 3M announced it would rebase the dividend to ~40% of adjusted free cash flow, resulting in a quarterly payment of $0.70, which ended its multi-decade streak. It makes total sense, though, given the slimmer post-spin cash engine.
Beyond that factor, legal overhangs amplified the pressure. 3M agreed to pay up to $10.3 billion to U.S. public water systems for PFAS over 13 years and up to $6 billion for Combat Arms Earplugs between 2023 and 2029, and it’s fair to say that those obligations sit ahead of bumper dividends.
Deleveraging, Discipline, and a Leaner 3M
Following the dividend cut, management redirected dollars toward litigation outflows and an operating overhaul dubbed “3M eXcellence,” with some improvements indeed taking place. Last quarter, for instance, 3M’s adjusted operating margin hit 24.5% (up 290 bps YoY) and adjusted EPS rose 12% to $2.16. Despite $2.2 billion in litigation payments pushing operating cash flow into the negative, adjusted free cash flow still printed $1.3 billion, proving that the core engine is leaner.
On the balance sheet, the quality of the mix improved even if the top-line figure didn’t. Short-term borrowings and current maturities dropped to $669 million at the end of June, down from $1.9 billion a year earlier, while total debt held around $13 billion. 3M also restarted buybacks, returning $1.3 billion to shareholders in Q2 through dividends and repurchases.
Why a Payout Rise Looks Unlikely
Despite the sour taste of a recent dividend cut, the business is indeed improving, which raises the question of whether the dividend can ever reach its prior highs again. The short answer is, not likely. Management remains focused on maintaining cash discipline and addressing legacy risks, including the exit from all PFAS manufacturing by the end of 2025. With settlement schedules stretching years and a stated 40% adjusted FCF payout policy, there’s no incentive to reconsider bringing back a dividend.
That reality is evident in the dividend’s new cadence: a modest lift from $0.70 in 2024 to $0.73 per quarter in 2025. It’s an incremental move, not a revival, reflecting a strategy that prioritizes flexibility while liabilities are worked through. For income investors, the trust has already been broken, and 3M is unlikely to regain it soon. Redirecting capital toward the balance sheet makes more sense than chasing higher payouts.
Valuation on Thin Ice: A High Multiple for a Slow Burner
Now, at roughly $155 per share, and using a 2025 EPS consensus near $7.90, the stock trades around 20x forward earnings. For a mature multi-industrial with ongoing legal cash needs and modest growth, that’s rich. Meanwhile, management’s latest guide implies ~2% adjusted organic growth for 2025, which is solid blocking and tackling, but hardly a high-octane runway.
The sector median valuation stands at about 23.3x, which might imply that MMM is trading at a discount. However, given the lack of strong organic growth and the fact that indebtedness remains high even after the recent deleveraging efforts, I believe the stock should be trading at a multiple of 15-16x EPS.
Is 3M a Buy, Sell, or Hold?
Wall Street is somewhat bullish on 3M, with the stock carrying a Moderate Buy consensus rating based on five Buy, three Hold, and two Sell ratings over the past three months. Nevertheless, 3M’s average stock price target of $157.56 suggests ~1.5% upside from current levels, which indicates little to no short-term upside potential.
A Tighter Ship With a Tamer Dividend
3M’s dividend cut last year was a rational move—shrinking post-spin cash flows, heavy legal obligations, and a formal 40% payout policy made it inevitable. The operating tune-up is yielding results in higher margins and tighter execution, but settlement payments will persist for years, and the PFAS exit remains a significant overhang.
At $0.73 per quarter, the dividend offers little growth potential, leaving the income case underwhelming. Add a high-teens P/E to a slow-growth, litigation-burdened franchise, and the risk-reward skews poorly. I remain bearish and prefer more reliable yield opportunities at better valuations.