Published November 6th, 2016 by Bob Ciura
There are many Dividend Aristocrats from the industrials sector. One could argue that none is as impressive as 3M (MMM).
3M’s history goes all the way back to 1902, when it was a small mining venture. 3M was originally known as Minnesota Mining and Manufacturing. Its founders started out with a very simple goal: to harvest corundum from a mine called Crystal Bay.
There wasn’t much corundum to be mined, but over the next 114 years, 3M grew into one of the biggest industrial conglomerates in the world.
3M is a Dividend Aristocrat with a very impressive track record. It has paid dividends for 100 years, and it has raised its dividend for 58 years in a row. Not only is the company one of only 50 Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases – it is also a Dividend King. The Dividend Kings are businesses with 50+ consecutive years of dividend increases.
Keep reading this article to learn more about the investment prospects of 3M.
3M is the poster child for a diversified manufacturer. It manufactures 60,000 products which are sold in 200 countries.
The business is organized into five major operating segments, based on product categories:
- Industrial (34% of total revenue)
- Safety and Graphics (19% of total revenue)
- Health Care (18% of total revenue)
- Electronics and Energy (16% of total revenue)
- Consumer (13% of total revenue)
The company has experienced difficulties over the past year. Due to the strong U.S. dollar and slowing economic growth in the emerging markets, 3M’s worldwide sales declined 0.9% over the first nine months of the year.
Still, 3M has areas of strength as well. Its strongest businesses right now are health care and consumer products. Revenue in the health care and consumer segments increased 2.7% and 2%, respectively, over the first nine months.
Health care segment sales increased 3.5% over the first half of the year. This is not surprising, since global health care spending in many countries will exceed GDP growth, due to the aging populations in many parts of the world and the ensuing need for health care. In addition, 3M’s safety and graphics business posted 3.8% sales growth through the first six months of the year.
These two businesses are growing at high rates for the company this year, even though macro-economic conditions remain difficult. If the global economy picks up steam, 3M will likely enjoy robust growth next year and beyond.
3M has excellent growth prospects. Through 2020, 3M management predicts earnings-per-share will grow 8%-11% annually. It also expects to generate at least 20% return on invested capital each year.
Source: 2016 Investor Day Presentation, page 14
There is reason to believe these goals are attainable; 3M has demonstrated a proven ability to efficiently allocate capital. For example, 3M generated 22% return on invested capital last year.
Among its key growth drivers, 3M will benefit from growth in its health care, and safety and graphics businesses. Going forward, 3M expects health care revenue will grow 4%-6% per year through 2020, while safety and graphics sales are projected to increase 2%-5% annually through the end of the decade.
Competitive Advantages & Recession Performance
Any company that has paid dividends for as long as 3M has obviously holds a durable competitive advantage. In 3M’s case, its biggest competitive advantage is its research & development. 3M has 46 technology platforms and a team of scientists, dedicated to fueling innovation.
Throughout its history, 3M has obtained over 100,000 patents.
3M continues to invest in R&D, even when the external environment becomes more challenging. In 2015 3M spent $1.8 billion on R&D, which was 5.8% of sales.
Another growth catalyst for 3M is its strong brand portfolio. Some of 3M’s most recognizable products include Scotch tape and Post-it-Notes.
In addition, 3M enjoys tremendous scale. It has a $100 billion market capitalization, and reaps significant efficiencies which fuel its high returns on capital.
3M’s large product portfolio consists of many strong brands, and each of its business segments generates high profit margins.
Source: 2016 Investor Day Presentation, page 7
3M’s focus on maintaining high margins is constant. For example, 3M is undergoing a business transformation to streamline its operations and cut costs. It has conducted significant bolt-on acquisitions over the past few years, along with some divestitures of a few businesses deemed non-critical to the company’s future.
Source: 2016 Investor Day Presentation, page 20
It expects its restructuring to yield $500-$700 million in annual cost savings by 2020, and another $500 million reduction in working capital requirements.
3M got through the Great Recession, but took some damage along the way. Earnings-per-share declined 19% from 2007-2009, which is a fairly mild decline considering 3M’s exposure to the global economy. And, 3M was one of the fastest industrials to recover from the recession. Earnings-per-share reached a new high in 2010:
- 2007 Earnings-per-share of $5.60
- 2008 Earnings-per-share of $4.89
- 2009 Earnings-per-share of $4.52
- 2010 Earnings-per-share of $5.75
3M is not completely recession resistant, but managed to remain profitable during the recession.
Valuation & Expected Total Return
3M stock trades for a price-to-earnings ratio of 21. This is slightly below the S&P 500 average valuation of 24. But, 3M stock trades above its average price-to-earnings ratio since 2000, of 18.
As a result, 3M stock appears fairly valued, or perhaps slightly undervalued. There may not be much room for 3M’s price-to-earnings ratio to expand.
That being said, investors will earn significant returns from 3M’s earnings growth and dividend. The company currently pays a dividend of $4.44 per share. Its current dividend yield is a solid 2.7%, which exceeds the 2% average dividend yield in the S&P 500.
Even better, thanks to its high returns on capital, the company returns a lot of cash to shareholders. Earlier this year, 3M increased its dividend by 8% and also announced a $10 billion share repurchase program.
Assuming management’s projections of 8%-11% earnings growth are accurate, shareholders can do quite well in the stock. In addition to the 2.7% dividend yield, total shareholder returns could each 10.7%-13.7% annualized.
3M is one of the most tried-and-true Dividend Aristocrats. It has a very effective management team and many catalysts for future growth.
The stock has risen significantly in the past five years, which has elevated its valuation. While 3M stock may not be the screaming value it was during the Great Recession, it is still an attractive pick for dividend growth investors.
The company’s combination of decent yield, growth, and stability rank it in the top third of high quality dividend growth stocks using The 8 Rules of Dividend Investing.