On Feb 11th, 3M announced a 4.2% increase in their quarterly dividend, making 2008 the 50th consecutive year that the company has increased their dividend. Although, the dividend increase is only marginally above the rate of inflation their payout ratio has slowly been coming down. The 5 year average payout ratio is approximately 39% while their current payout ratio is about 33.5%. The Moneygardener has suggested on his blog that perhaps the paltry dividend increases are a result of 3M bulking up for future acquisitions and I certainly agree that’s a probable option. However, another reason for the small dividend increase could simply be that management is taking a cautious approach. I’m speculating that the management at 3M is like most of the large and small players in the market, just waiting to see what happens to U.S economy. Will there be a recession? If so how bad will it be? Although, 60% of 3M’s revenue now comes from outside the U.S they are still very closely tied to the U.S economy and are often used as a barometer for the overall health of the U.S economy.
As an investor in 3M I like to see management taking a cautious approach. Personally, I would rather a small dividend increase in uncertain markets than a large dividend increase that could become unsustainable if global markets start to erode.
(Disclaimer: I currently own shares of MMM. However, I am not a financial advisor. Please do your own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)