- 3M is a cash-generating machine that is returning much of its cash to investors in the form of dividends and buybacks.
- 3M’s diversification makes it a safe bet to invest in for the long run.
- 3M is slated to continue its acquisition spree going forward, which means that investors can expect the company to bolster its dominance.
Industrial giant 3M (NYSE:MMM) has had an indifferent year so far. However, the diversified industrials company's solid dividend and buyback plan are key reasons why investors flock to 3M. In addition, 3M has been a stable performer and looks like a good bet for conservative investors. Hence, it would be a wise idea for investors to capitalize on 3M's slow start to the year, as it could be a good long-term investment. Let's see why.
Rewarding the shareholders
3M has been reporting solid earnings growth, this has enabled it to generate enough cash flow to sustain its strong dividend yield of 2.60% and aggressive buyback plans. For instance, in the last reported fourth quarter, earnings had increased 14.9% year-over-year, while operating income came in at $1.6 billion and operating margins for the quarter were 20.9%.
3M generated net income of $1.1 billion and converted 131% of its net income to free cash flow. 3M paid $423 million in cash dividends to shareholders and repurchased shares worth $1.7 billion during the quarter. The company expects 2014 earnings to be in the range of $7.30 to $7.55 per share. This means that shareholders can expect the company to return more cash, as free cash flow conversion is expected to be in the range of 90% to 100%.
In the long run, 3M is planning to repurchase $17 billion to $22 billion worth of shares by 2017. This reflects the strength of the company's business model and confidence in the future.
3M has been undertaking numerous strategies to bolster its business. It has been combining and scaling businesses in electronics and energy to better serve customers, gain rapid cost synergies and strengthen underperforming businesses. 3M adopted similar plans in the safety and graphics segment to enhance its product offerings and improve its relevance to customers.
3M has also increased its investment in long-term disruptive technologies, aimed at opportunities with significant growth potential. It has made good progress with its business transformation moves, enabled by its global enterprise resource planning (ERP) implementation. 3M has rolled out the ERP implementation in several countries, and this should lead to better synergies, cost reduction and better management.
3M is also looking to optimize its capital structure. It is planning to reduce its total cost of capital, which would allow it to deliver higher returns to shareholders. 3M is focusing on organic growth to deliver on these counts, so it is investing in CapEx and research and development. On the other hand, 3M is planning to invest $5 billion to $10 billion in acquisitions through 2017, and it might do even more in case it gets the right strategic opportunities.
A look at the end-markets
3M's automotive OEM business is posting robust organic growth. For example, last year, it saw 7% organic growth in the segment, which was more than twice the rate of global auto production. Improved customer relevance and the use of 3M's vast technology capability to solve problems for its important OEM customers is driving growth in this segment. The company is counting on developing markets, such as China, Mexico and Indonesia by offering relevant solutions to these rapidly growing markets to grow its automotive business further.
Also, 3M's safety and graphic business is seeing margin expansion on the back of greater scale and reduced costs. Moreover, the improved profitability of recent acquisitions is also a driving factor behind the good performance of this business segment. For instance, the Ceradyne acquisition played a key role in adding 0.7 points to sales growth in the previous quarter.
3M's industrial business is also demonstrating strong growth. This business was up 6% in organic terms last quarter, and the same trend could be expected in the future on the back of increased industrial spending and acquisitions.
The healthcare business, on the other hand, is also generating strong organic growth. Driven by growth in health information systems, food safety and critical and chronic care, 3M could see more organic growth in the future from this segment.
Valuation and conclusion
Quarterly Revenue Growth (YOY)
Quarterly Earnings Growth (YOY)
Five-year earnings growth CAGR
Source: Yahoo Finance
The gap between 3M's trailing P/E ratio of 19.81 and forward P/E ratio 16.21 indicates earnings growth as the company continues its share buybacks and focuses on reducing capital expenditure. Moreover, the earnings growth expectation for the next five years is also quite strong, given 3M's big size and diversified nature. Hence, investors can expect the company to continue performing well and return huge amounts of cash, making it a good long-term investment.
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.