Fix a broken tail light. Use as shoe laces. Remove paint. Make a rope. Remove scuff marks. Use as a bandage. Prevent rust. Repair a leak. Clean piano keys. Patch holes. Fix luggage zippers. Use as a belt. Clean spray paint nozzles. Gum remover. Stop squeaks. Use as a coffee cup.
Those are just a handful of the thousands of possible uses I found when looking at the two products, WD-40 and Duct Tape. I believe that providing investors with long term returns should be added to that list.
WD-40 lubricant is one of the many products offered by the WD-40 Company (WDFC). WDFC is a small cap company that provides multi-purpose maintenance products through several of its brands (WD-40, 3-IN-ONE, Blue Works, 2000 Flushes, Carpet Fresh, Lava, and others). WDFC was founded in 1953 and is headquartered in San Diego, California.
Duct Tape is made by several companies, but one of the market leaders is the 3M Company (MMM). 3M is a large cap company that operates in a wide number of industry segments (Industrial, Transportation, Healthcare, Electronic, Communications, etc.) 3M, formerly known as Minnesota Mining and Manufacturing Company, was founded in 1902 and is based in St. Paul, Minnesota.
By reviewing each stock's history, dividend, current financials and valuation, as well as, each company's future outlook, I will demonstrate why I feel that both of these companies should be considered as buys for long term growth investors.
Stock History of Both Companies (10 years in the making)
Looking at a stock's history doesn't guarantee anything about its future, but it does provide insight into how well the company has managed over a specific set of time. For WDFC and MMM, let's take a look at what a $10,000 investment 10 years ago would look like today with dividends being reinvested. (results provided by buyupside.com)
A $10,000 investment in WDFC ten years ago would be worth $26,633 today. That's a gain of 166.33% (10.29% annualized).
A $10,000 investment in MMM ten years ago would be worth $20,302 today. That's a gain of 103.025 (7.34% annualized).
Recent Developments and Product Information
- WD-40 Bike - WDFC recently announced the launch of WD-40 Bike, a subsidiary business unit focused specifically on cycling maintenance products. The new WD-40 Bike line of products will be featured in bicycle retail shops throughout the US.
- WD-40 Specialist Line expanded with three new products released a few months back: Dirt & Dust Resistant Dry Lube, Machine & Engine Degreaser, and Electrical Contact Cleaner Spray
- Getting The Job Done - Late last year, WDFC launched a new website dedicated to helping professional learn how to use WD-40 products and related items to get their jobs done right.
Current Financials and Valuation
|Return on Assets||11.92%|
|Return On Equity||22.26%|
|Revenue Per Share||23.04|
|Quarterly Revenue Growth||7.00%|
WDFC has seen its revenue increase from $292 million in 2009 to $343 million in 2012 and is on pace to see increases this year as well. Sales of WD-40 Multi-Use Product increased 9% in Q3 compared to the same period last year.
WDFC is currently trading at $59.12, with a price to earnings of 22.97x and a price to book value of 4.99x.
As you can see from the chart above, WDFC's stock price has seen a fairly steady long term incline over the past 40+ years. You can also see that the pace of increased prices has increased in recent years. I believe that WDFC's initiatives toward increasing its presence in new markets as well as continually adding to its product line is the driving force behind this increased pace of return.
WDFC reported Q3 earnings per share of $0.66 . This was $0.10 higher than predicated estimate and also $0.05 higher than the same period last year. WDFC has an estimated growth rate of over 12% for the next three to five years. This coincides with WDFC's strong history of increased long term net income.
WDFC currently pays a quarterly dividend of $0.31 per share for an annual yield of 2.09%. It's payout ratio sits at 46%.
WDFC has been increasing its dividend since 2002, although not on a yearly basis (yearly increases have been seen from WDFC since 2010). WDFC's quarterly dividend has grown 55% during the past ten years from $0.20 per share to its current $0.31 per share quarterly dividend.
WDFC continues to focus on strategic initiatives that will lead to increased revenues and earnings in future years.
- Maximize WD-40 Brand - WDFC has increased its distribution internationally, with a strong focus on European markets.
- Become global leader in specialized platforms - WDFC issued first ever product expansion within its WD-40 Specialist Brand and launched WD-40 Bike
- Build beneficial business relationships through acquisitions, and/or partnerships - WDFC is exploring possibilities within the home care and cleaning products market.
- Innovation - WDFC is researching and developing new products related to lawncare and maintenance.
A significant amount of WDFC's recent growth has come internationally and as the company increases its product offerings throughout Europe, Asia, and Latin America, it appears likely that revenue increases will continue for some time. And as WDFC continues to reduce its businesses in low margin products, earnings should continue to rise as well.
Recent Development and Product Information
- 3M recently introduced 3M FIP 1-Step Firestop Foam that provides time and cost savings in terms of fire protection for contractors, etc.
- 3M wins obtains contract by Palmetto Health for its 3M 360 Encompass System to integrate and automate medical records coding, clinical documentation improvement (CDI), and performance monitoring across the health provider's four acute-care hospitals.
- 3M makes available its one of a kind Active Optical Cable (AOC) Assembly for QSFP+ to SFP+ Applications. It incorporates industry-leading VCSEL and 3M light-engine technologies to deliver exceptional cost and performance value for data centers and high-performance computing (HPC) clusters
- 3M's True Definition Scanner and the TS150 System featuring FastDesign™ Software provides dentists with a simple, convenient and affordable solution for same-day dentistry procedures.
Current Financials and Valuation
|Return on Assets||13.12%|
|Return On Equity||25.17%|
|Revenue Per Share||11.09|
|Quarterly Revenue Growth||2.89%|
MMM has seen increases in revenue from $23,123 million in 2009 to $29,904 in 2012. MMM is on pace to see increased revenues and profit this year as well as it continues its trend of long term revenue and profit increases.
The shaded grey areas in the chart above reflect recessions in the US economy. You can see that MMM's trend of increased revenues and profit was only slightly affected by economic downturns.
MMM is currently trading at $113.32, with a price to earnings value of 17.7x and a price to book value of 4.3x.
MMM reported Q2 earnings per share of $1.71. This was $0.01 higher than predicted estimate and also $0.05 higher than the same period last year.
As you can see from the chart above, 3M's earnings have risen consistently over the years in a similar manner to its revenues, with only short periods of negative growth. What you can also see is that US recessions seemed to have a bit more of a short term impact on MMM's earnings compared to its revenues, with the latest recession having the greatest impact.
MMM has an estimated growth rate of nearly 7% over the next three to five years. I wouldn't consider MMM a growth stock, but I am confident it will continue to grow (albeit at a slow pace). As MMM continues to expand its already enormous product line, I believe that it will continue to reward investors for years to come.
MMM currently pays a quarterly dividend of $0.64 per share for an annual yield of 2.25%. It's payout ratio is 40%. MMM is a dividend aristocrat and has had yearly increases of its dividend since 1959.
In the chart above, you can see that MMM's dividend yield has for the most part consistently remained between 2% and 4% with dividend growth continuous but sporadic with yearly growth from less than 1% to over 5%. There is no reason to believe that 3M's continued dividend growth won't continue, the only question is how fast will it grow.
I believe that MMM's future is going to be great. In Q2, revenue grew at a 3% pace which was a record for any quarter in this history of the company (pretty impressive for a company over 110 years old). 3M continues to grow internationally with large increases in revenue in countries throughout Latin America as well as Canada.
MMM continues to increase its research and development costs and for an innovative company like 3M I believe that will lead to great things. The company has been able to increase cash flows while returning shareholder value through dividends and stock purchases. With its diversity and ability to continuously add to its product line (from items discussed above in the 'Product Information' section to others including the launch of the Home Collection through its Post-It and Scotch brands and its new line of sports medicine products through its ACE brand), I feel confident that MMM will continue to deliver revenue, profit, earnings, and shareholder return growth for years to come.
I feel that both WDFC and MM are currently fairly valued. I believe that recent price drops (WDFC from $64.23 to its current price of $59.12 and MMM from $119.26 to its current price of $114.70) has created a nice opportunity for buyers. Neither of these two stocks are going to see the type of quick price appreciation that a company like Tesla (TSLA) or Apple (AAPL) will see, but they also won't see large drops in prices that stocks like TSLA and AAPL are prone to.
WDFC has shown a strong commitment to providing shareholder value (WDFC's five year average ROE is over 17%) and management has been able to increase the book value of the company substantially (from just over $50 million in 2000 to nearly $200 million today).
Just like WDFC, MMM also has a strong commitment to its shareholders, providing solid returns and increasing the book value of the company by over $10 billion since 2000.
I think both of these two stocks are perfect for investors who believe in the old saying, "Slow and steady wins the race" and based on each company's strong past and current performance, growing dividends, and solid company outlooks, I consider both to be buys for long term investors. As always, I suggest individual investors do their own research before making any investment decisions.