Summary
-3M Company is a diverse conglomerate with a reasonable dividend yield and a reasonable valuation on top of decent growth prospects.
-Revenue, earnings, and cash flow have grown slowly over the past 5 years, in the range of about 3% per year each, but growth was fairly strong before the onset of the recession.
-The dividend yield is about 2.60% with a 41% payout ratio.
-The company has a conservative (fairly low debt) balance sheet, which is a great thing.
-I find the current price in the low $80s to be reasonably attractive with thought towards the long term.
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Overview
3M (symbol MMM), once called the Minnesota Mining and Manufacturing Company, was founded in 1902. The company, now with nearly 70,000 employees, produces products like Scotch tape, projector systems, Post-it notes, Tartan track, and Thinsulate. This is a conglomerate that produces products many industries and for both personal and business use, and their manufacturing, research, and sales offices are all over the world.
Business Segments
The company is divided into six business segments:
Consumer and Office Business
This segment provides solutions for the home and office, and includes well-known products like Scotch tape. This segment accounts for about 14% of sales.
Display and Graphics Business
This segment provides display films, reflective materials, projection systems, and the like. This segment accounts for about 14% of sales.
Electro and Communications Business
This segment provides solutions for electrical and communications industries by means of tapes, splicing, and connectivity. This is the smallest segment, contributing about 10% of sales.
Health Care Business
This segments provides several products in the areas of wound care, oral care, drug delivery systems, and more. This segment has the highest profit margin and accounts for about 17% of sales.
Industrial and Transportation Business
This segment provides adhesives, abrasives, filtration systems, fasteners, and specialty materials to a variety of industries from renewable energy to aerospace. This is the largest segment, accounting for about 32% of sales.
Safety, Security, and Protection Services Business
This segment provides several safety products like respiratory protection, eye and ear protection, building safety solutions, and more, and accounts for about 13% of sales.
Revenue, Earnings, Cash Flow, and Margins
3M has had fairly low growth over this past half-decade. The growth is atypical in part due to the global economic crisis of these past couple years.
Revenue Growth
| Year | Revenue |
|---|---|
| 2009 | $23.123 billion |
| 2008 | $25.269 billion |
| 2007 | $24.462 billion |
| 2006 | $22.923 billion |
| 2005 | $21.167 billion |
| 2004 | $20.011 billion |
Over these 5 years, 3M has had an average of 3% annual revenue growth. The period between 2004 and 2008, however, shows 6% average annual revenue growth.
EarningsGrowth
| Year | Earnings |
|---|---|
| 2009 | $3.193 billion |
| 2008 | $3.460 billion |
| 2007 | $4.096 billion |
| 2006 | $3.851 billion |
| 2005 | $3.104 billion |
| 2004 | $2.833 billion |
3M has had 2.5% earnings growth over this 5-year period.
Cash Flow Growth
| Year | Cash Flow from Operations |
|---|---|
| 2009 | $4.941 billion |
| 2008 | $4.533 billion |
| 2007 | $4.275 billion |
| 2006 | $3.839 billion |
| 2005 | $4.204 billion |
| 2004 | $4.228 billion |
Cash flow for 3M has grown at an average of 3% annually over this period.
Profit Margin
3M has a 15% profit margin.
Dividends
The company currently has a dividend yield of about 2.6% and has a long history of dividend increases.
Dividend Growth
| Year | Dividend | Yield |
|---|---|---|
| 2009 | $2.04 | 2.70% |
| 2008 | $2.00 | 2.80% |
| 2007 | $1.92 | 2.30% |
| 2006 | $1.84 | 2.60% |
| 2005 | $1.68 | 2.20% |
| 2004 | $1.44 | 1.80% |
Annual dividend growth over this period has been over 7%, which is pretty good. Dividend growth has slowed, however, since the start of the recession.
The payout ratio is currently about 41% which is moderate and safe. This provides plenty of room for dividend growth into the future.
Share Repurchases
Over the past four years, 3M has repurchased several billion dollars worth of stock and has issued some stock as well. The net reduction in shares over the past four years is only a few percent of the current market capitalization.
Balance Sheet
For 3M, the LT Debt/Equity ratio is 0.37 and the Total Debt/Equity ratio is 0.43. This is a fairly conservative balance sheet, which is a great thing.
Investment Thesis
3M is a diverse company that provides solutions all over the world. To put it as bluntly as possible, 3M produces the “stuff” that we may take for granted that helps everything else run. They produce the tapes, the materials, the films, and so forth, that allow homes, offices, and equipment to work properly. A lot of people don’t realize how much thought and complexity has to go into things that seem fairly simple, and instead we focus on the final product or the final service. 3M, on the other hand, focuses on the little things in a big way.
Because the products are so diverse and so necessary, 3M doesn’t seem to be going anywhere anytime soon. Unlike many companies, there is no loss of a single industry that could permanently disrupt them, or some new technology that could quickly make them obsolete, or some competitor that could figure out how to do everything 3M does except better.
In a recent presentation, 3M has highlighted several specific areas that seem to have good growth prospects for itself. Some of these include:
-Water Infrastructure
-Renewable Energy
-Projection Systems
-Aerospace
-Health Care Purification
-Health Care in Developing Countries
-International Consumer Products
-and basically anything involving China
Some of these are areas that 3M is already involved in and others are areas that 3M is interested in getting into.
The company has research and development facilities all over the world. Some of their recent facilities are in Poland, Russia, Korea, China, Singapore, South Africa, and Brazil.
In 1998, emerging markets contributed 16% to 3M sales. In 2009, this number was 29%.
3M is an interesting combination of research and development into new products and an impressive world distribution system. It is a large and stable organization, yet not so big to make significant growth difficult.
Risks
Like any company, 3M has risks. Their recent profit and revenue decreases were a result of the global recession. 3M does well when their business customers do well because they sell more products. For 3M to operate successfully they will continue to need a reasonably healthy world business environment.
Conclusion and Valuation
In conclusion, 3M is a great and diverse company with a good dividend history and a reasonable payout. The balance sheet is strong and the valuation is quite reasonable.
EPS for 2009 was $4.69. Projected EPS for 2010 and 2011 are $5.63 and $6.21 respectively. At the current price of about $81, this comes to a P/E of 17.2 for 2009, 14.4 for 2010, and 13 for 2011. These are of course not necessarily reliable, but I do believe 3M will make up the earnings ground it has lost in this recession and then some.
Full Disclosure: I do not have any position in MMM at the time of this writing.
You can see my full list of individual holdings here.
Further reading:
Emerson (EMR) Dividend Stock Analysis
Wal-Mart Stores (WMT) Dividend Stock Analysis
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
8 Reasons to go with Dividends
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