It’s a tough time to be a true industrial conglomerate. While the woes of 3M Co. (NYSE: MMM) may still be light years better than a generally eclectic rival conglomerate, 3M seems to have lost its way. Currently very few investors and analysts seem willing to stick their necks out on when 3M’s road to recovery will become smooth sailing. After a very strong 2017, and after its shares peaked at almost $260 in January of 2018, 3M shares have lost nearly one-third of their value, and the company cannot directly blame just one or two macro issues outside of its control.

The big question that investors need to ask is whether 3M’s continually rising dividend is safe. They also should have a right to wonder if 3M can sustain its multidecade streak of annual dividend hikes. When 3M raised its dividend 6% to $1.44 per share each quarter in February of 2019, that marked more than 100 years of consecutive dividend payments and it made for 61 consecutive years of dividend hikes. That blows away the so-called Dividend Aristocrats and makes 3M one of just a tiny portion of S&P 1500 companies with 50 years of dividend hikes.

It may seem way too soon to question 3M’s consistent history of dividend hikes. After all, 61 years is a better track record than most of the investing community can even physically vouch for. What has changed in recent years is that 3M made some rather aggressive dividend hikes since the Great Recession.

The 3M dividend hike announcement from February of 2019 was up 6% from the prior year. At the time of that hike, CEO Mike Roman talked up the strength of 3M’s business model enabling it to generate premium margins and strong cash flows consistently and to build on its long history of returning cash to its shareholders. That said, many things were happening up to that point and a lot of things have happened since then.

3M’s dividend hikes were above normal in 2018 (16%), 2015 (20%) and 2014 (35%). That has led to nearly a tripling of the dividends per share paid out to investors since the end of the Great Recession. Its current dividend yield is 3.3%, which is now well above average for Dow Jones industrials and the S&P 500. It is also more than 125 basis points higher than the 10-year Treasury note.

The dividend announcement of May 2019 also showed that the share count had dropped to 576,426,706 common shares. An annualized dividend payout of $5.76 per share implied a baseline annual dividend liability of $3.32 billion every year that has to come out of earnings. 3M’s operating earnings rose to $7.33 billion in 2017 but ticked lower to $6.87 billion in 2018, and that figure is expected to be down roughly 10% on an adjusted earnings-per-share basis. 3M’s net income from operations was $5.36 billion in 2018.

3M’s long-term debt has risen in recent years and likely will be higher yet again in 2019. That long-term debt balance stood at $8.75 billion at the end of 2015 but has risen each year, and 3M ended 2018 with some $13.4 billion in long-term debt. Earlier in 2019, 3M announced a realignment wherein it took five business groups down to four.

In May of 2019, 3M announced a $6.7 billion enterprise value acquisition of Acelity. While the deal comes at 11 times adjusted earnings before interest, tax, depreciation and amortization (EBITDA) and is said to be $0.35 per share accretive to earnings in the first 12 following completion of the deal, 3M adjusted its full-year 2019 share repurchase commitment down to a range of $1.0 billion to $1.5 billion from the original range of $2.0 billion to $4.0 billion. 3M also said that it plans to finance the Acelity buyout with available cash and proceeds from new debt.

Without considering where interest rates are heading beyond the next year or two, 3M has increased its debt and therefore its annual debt servicing costs, assuming no change in the average weighted interest rates or in borrowing terms. 3M already has targeted lowering its stock buyback plans to help pay for the Acelity buyout, and it is crossing paths where 3M may have been too confident in its dividend hikes to get its static dividend liability up to over $3.3 billion.

One thing that may keep this dividend and future hikes safe at the board level is common sense. 3M’s board of directors almost certainly knows that ending a 61-year dividend hike, even if that streak gets to 65 years or 70 years, would be received terribly by shareholders. Shareholders love dividend hikes, and they hate dividend cuts. 3M needs to be committed to perpetual dividend hikes if the laws of numbers will allow for it.

Another issue on valuations now and looking ahead is that 3M has unpredictable earnings with a series of earnings disappointments, as 3M’s 2018 earnings was $10.46 per share. Most analysts have become skittish and are not willing to commit to exactly when 3M’s big turnaround will come.

According to Morningstar, 3M’s forward price-to-earnings ratio is 17.83. Refinitiv has 3M valued at 18.5 times expected 2019 earnings and 17 times expected 2020 earnings. Those are not shockingly expensive, but for a company with unpredictable earnings, it is also not exactly cheap.

3M may be a partial victim of its own success before the last management succession. In 2018, 3M announced that Michael Roman would replace Inge Thulin as chief executive officer. Thulin had been 3M’s CEO and president since 2012, and he was then set to become executive board chair after his mid-2018 succession.

At the start of 2018, 3M had blown the doors off of its 2017 expectations from analysts with a gain of more than 31% (versus a mere 6% expected gain at the start of 2017). At the start of 2018, its shares were already valued at more than 5% higher than the Refinitiv consensus price target at the time, and 2018 was when 3M’s fundamental problems met its valuation problem. Unadjusted for dividends since then, 3M’s 2017 year-end price was $235.37 — versus about $174.50 at the current time.

One issue that has become more prominent in recent months is an environmental exposure tied to polyfluoroalkyl substances (PFAS). This has exposure via personal injury liabilities and groundwater cleanup costs. That exposure is still not fully known, but a report from Merrill Lynch recently noted that 3M’s individual portion of approximately $18 billion in pretax liabilities could be about half of the total. This total dollar amount is still not fully known, and the situation could take years to settle before the full extent of the liability is determined. If the outcome ends up being in the billions of dollars, will 3M then have to take on even more debt or will it be able to fund a pool and pay over time? Either way, liabilities from the past that are no longer really contributing to earnings and revenues likely will contribute to the future liabilities, and it is impossible to quantify what that price tag may be.

Merrill has a Neutral rating and $185 price objective on 3M. Its updated analysis conservatively incorporates a higher number of contaminated sites, while its initial base case only considered sites that had already filed suit. The firm believes that 3M has sufficient financial resources to meet future obligations and that the current share price already reflects investor concerns around PFAS. Its Neutral rating reflects limited near-term execution visibility and PFAS liability, but they meet what has been called a best-in-class global franchise and solid balance sheet. There is still the issue about what is driving margins lower and there is no solid plan on how and when 3M can get its margin expansion back on track.

Merrill’s latest investment rationale concluded:

In our view, the core issue is disruption from companywide ERP rollout, which is scheduled to continue for at least another year, and we see limited opportunity for near-term improvement.

According to Dividend.com, 3M’s dividend reliability shows that the payout ratio is healthy and that the company leaves ample room for reinvesting its earnings to grow.

3M has closed off its old pension plan to new hires about a decade ago, but it continues to have funding obligations due to investment return shortfalls and other issues. The 2018 annual report showed that 3M contributed $366 million to its total pension plans in 2018 and $964 million in 2017, but in 2019 it had planned to contribute between $100 million and $200 million. Future contributions would depend on market conditions and other factors.

There are other issues to consider on top of the recent Acelity acquisition (which shareholders have a right to question now). 3M’s latest earnings debacle was yet another share price killer. 3M also has made a pledge to convert all its energy usage to be sourced from clean and renewable sources in a move that will take years to realize.

If you add everything up, 3M’s current dividend and even a mild hike actually should be safe even beyond 2019 and 2020. That said, with rising recession risks and with its own recent uncertainties, it seems almost certain that 3M will have to focus on very small dividend hikes, based on the currently available information.

As for the safety of the future dividends and hikes under a recession scenario, a lot just depends on how severe the next recession will be and how 3M lines itself up ahead of that recession. If you take a more negative scenario in which 3M’s dividend liability ticks up, with higher debt servicing costs and with a continued downward earnings pressure rather than an earnings recovery, then 3M might find that it has to take more drastic measures to keep investors from worrying about its dividend payout. It looks rather difficult with the recent wave of earnings uncertainties to calculate how 3M might have to treat its dividend if the next recession is worse than expected, or if 3M has a harder time dealing with the next recession than its industrial peers.

The good news for 3M investors is that the shares recovered with the broader market in June. It was last seen up about 9% over the past month, but that was still down about 8% year to date.

3M recently traded at $174.50, and it has a market capitalization of $101 billion. Its 52-week trading range is $159.32 to $219.75 and the consensus target price from Refinitiv is $181.38. At the start of 2019, Refinitiv had a consensus analyst target of $203.94, which was lower than a year earlier when the target price was $223.08.

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