Many investors believe that there is a lot of froth in the markets, returns are no longer sustainable and that there must be a correction soon. The one year performance for the U.S. market is 17.4% (Finviz), and some are getting very nervous. Everybody is now asking how much longer this situation will last, and how one must alter his investment strategy moving forward in order to address this level of uncertainty.
This article suggests that one way to address this risk is to concentrate more on the large cap blue chip companies, companies that have a solid history of stable and growing returns regardless of the market environment. The stock that I am suggesting is 3M (NYSE:MMM). This company has a long history of stability and solid growth and would be a perfect candidate for one's portfolio if one were to be more decidedly conservative in his investment strategy. Listed below are some of the reasons why 3M is considered a good investment at this point, providing a steady and growing income and reasonable capital appreciation into the foreseeable future.
Many know the company for its Post-it notes, at least I do, but it is much more than that. The company is a conglomerate operating on a worldwide basis in many market segments, that being Industrial and Transportation, Healthcare, Consumer and Office, Safety, Security and Protection Services, Display and Graphics , and Electronics and Communications. The company grossed on a consolidated basis just short of $30 Billion this last fiscal year.
Diversification certainly has its benefits. The company has operations in 70 countries and its products are sold to over 200 countries. International sales is approximately 65% of total company sales (3M.com). The company is very diversified with respect to product line and with respect to its geographical reach. This is in essence its moat, where it competes with everyone and with no one. You can essentially see this company as a moving target. The company just recently deepened its moat by acquiring a company called Ceradyne this past November 29th (Reuters). However,since it does do so much business overseas, there is a currency risk, but since its operations are so extensive it is assumed that a hedging program is in place and the overall effect would be a wash.
Excellent Financial Results
This is a well run company and its returns over the last few years are very impressive. For purposes of this analysis, let's have a look a few financial metrics that matter.
3M has developed a reputation for effectively controlling its costs and maintaining its margins as evidenced by the chart above.
A comparison with the industry in which it resides shows clearly its superior results. The chart below shows that 3M's gross margin is almost twice that of the industry and sector. Its operating margin is approximately twice that of the sector and almost five times that of the industry. Its net profit margin is more than twice that of the sector and over five times that of the industry.
|GROSS MARGIN - 5 YR. AVG||47.46||23.59||25.43|
|OPERATING MARGIN - 5 YR. AVG.||21.26||4.57||9.24|
|NET PROFIT MARGIN - 5 YR. AVG||14.71||2.73||6.35|
The company is more conservatively financed when compared to the industry and sector. Its total debt to equity is 33.26 versus 119.07 and 74.91 for the industry and sector respectively. As a result its interest coverage (42.03) and margin of safety when it comes to the dividend is twice that of the sector (21.85) and more than four times that of the industry (10.30). Reuters
The company's profitability has allowed it to deliver a steady and growing stream of dividends to investors over time and this is expected to continue.
Investors can expect more of the same from 3M in the future. Fiscal 2012 results has allowed management to increase the dividend by 8% and authorize a $7.5 Billion Share Repurchase Program. This will help in boosting the price of the stock.
The company also reaffirmed its FY 2013 Guidance:
3M Co announced that for fiscal 2013, it expects earnings in the range of $6.70-$6.95 per share (NYSEARCA:EPS) with organic local-currency sales growth of 2%-5%. The Company reported revenue of $29.787 billion in fiscal 2012. According to I/B/E/S Estimates, analysts are expecting the Company to report revenue of $31.266 billion for fiscal 2013; EPS of $6.85 for fiscal 2013.
Expected Return Calculation
-2013 dividend as declared by management .635 x 4 = 2.54
-EPS of $6.85 for fiscal 2013 as declared by management
-using a historic P/E of 16.73 as provided by Reuters
-we get a share value at end of fiscal 2013 of :
6.85 x 16.73 = $114.60
- today's price 105.81
-total return = ( 6.85 + 114.60)/105.81
= 14.78% expected return
This is a reasonable return indeed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.