In its first quarter earnings announcement last week, 3M (NYSE: MMM) revealed that it will be cutting its dividend -- and that's actually good news. Sure, some income-focused investors will inevitably be disappointed, but it's the right thing to do for the company's development and to help remove uncertainty around the stock.

In addition, some other positives surfaced in the earnings report that make the stock an attractive buy. Here's what you need to know.

3M cuts its dividend

Management hasn't given a figure for the new dividend, but it will be declared in May. However, we do know it will be "approximately 40% of adjusted free cash flow," according to Executive Chairman (and former CEO) Mike Roman on the earnings call.

If we assume free cash flow (FCF) per share of $7.05 based on earnings guidance for 2024 (which excludes the now-spun-off healthcare business, Solventum), we arrive at a dividend per share of $2.82 for 2024. This implies a dividend yield of 2.85% at the current price.

I've discussed why 3M's decision to cut the dividend makes sense, and the same arguments apply now. 3M has significant multi-year payments to make as a result of legal settlements -- $12.5 billion for PFAS products over 13 years and $6 billion for combat arms earplugs from 2023 to 2029. In addition, the loss of stable cash flow from Solventum will negatively impact the FCF situation at a time when 3M also needs to invest in its business for growth.

Three reasons for optimism

Now, let's look at the bright side. The dividend cut will free up valuable cash to invest, and 3M's management can set about improving the company's lackluster growth rate. There are some reasons for optimism on that front, too.

First, 3M's most disappointing segments over the last decade have been its healthcare and consumer segments. Healthcare is now spun off as Solventum, and 3M's management is taking the axe to 5% of its consumer portfolio. Roman told investors earlier in the year, "We have identified approximately 5% of the portfolio where we have limited market growth and a poor right to win."

That's the kind of portfolio pruning that worked so well for Illinois Tool Works over the last decade, and investors will be hoping to see more of the same in the future from 3M.

Second, 3M has been fairly criticized for its mediocre margin performance over the last decade. Matters came to a head last year, and management launched a multi-year restructuring plan, including reducing headcount, simplifying its supply chain structure, adjusting its marketing model, and streamlining its corporate structure.

It's been a while, but it appears to be raising 3M's margins. For example, the company's adjusted operating margin (excluding Solventum) in 2023 was about 18.7%, but management expects that to improve to a range of 20.7%-21.45% in 2024.

Third, while the consumer segment remains weak as high interest rates pressure spending on home improvement and home care products, there are signs of a return to growth in the safety and industrial and transportation and electronics businesses. Overall, management expects adjusted organic sales growth of 0% to 2% in 2024.

Data source: 3M presentations.

3M is notably outperforming its end markets in electronics and automotives. While the first-quarter performance in transportation and electronics was affected by customers buying ahead "as they ramp production and introduce new products," it's still a sign of an improved environment.

A stock to buy

All told, 3M's growth and margin performance show signs of improvement. Now that there's greater clarity over the issue of legal settlements and the dividend cut is out of the way, investors can feel a lot more comfortable buying a stock trading at 14 times its estimates of 2024 earnings.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M and Solventum. The Motley Fool has a disclosure policy.

3M Cut Its Dividend: It's Time to Buy the Stock was originally published by The Motley Fool