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Summary

  • 3M shareholders can expect a CAGR of 11% to 13% over the next several years.
  • The company is planning to spend between $5 billion and $10 billion on acquisitions over the next 4 years.
  • 3M has increased its dividend for 56 consecutive years, one of the longest active streaks of any business.
  • The company hiked its dividend payment 35% this year.
  • 3M is growing developing market healthcare revenue at 10%.

3M (NYSE:MMM) is a globally diversified manufacturing and technology company. The business has a long history of profitability, with 56 consecutive years of increasing dividends. The company divides its operations into 5 divisions: Industrial, Safety and Graphics, Electronics and Energy, Healthcare, and Consumer. Revenue from the 5 divisions is split fairly evenly, industrial being the largest and consumer being the smallest.

Current Events

3M's first quarter constant currency revenue increased 4.6% on a year-over-year basis. 4.6% constant currency growth is in line with the company's long-term revenue growth projections of 4% to 6%. In the first quarter, 3M hiked its dividend 35%.

Industrial

The company's industrial division grew 4.9% on a constant currency basis. Operating margin increased from 21.5% in Q1 2014 to 22.3%. The industrial division has a leading market shares with industrial abrasives, auto body repair solutions, car care DIY, structural adhesives and tapes, filtration and purification systems, specialty additives, and tapes and fasteners for personal hygiene products.

Air purification and automotive OEM lead strong growth in the industrial division for the first quarter. Europe, Middle East and Africa (EMEA) growth and Canada/Latin America growth was strongest for the industrial divisions in the first quarter of 2014.

Safety and Graphics

The company's safety and graphics division grew 4.6% for the first quarter 2014 compared to the first quarter of 2013. The company has market leading positions in the following:

  • Respiratory, hearing and eye protection solutions
  • Reflective signage, for highway, construction and license plates
  • Premium large format graphic films for advertising and fleet signage
  • Roofing granules for asphalt shingles
  • Personal identification issuance and authentication products
  • Building safety solutions
  • Architectural design solutions for surfaces and lighting applications

Geographically, the safety and graphics division grew fastest in the Asia Pacific region. The company recently combined its commercial graphics, building and commercial services and architectural sub-divisions into one consolidated unit. This combination is expected to drive increased sales through better customer relevance and operating efficiencies.

Electronics and Energy

The company's electronics and energy division grew 4.1% for the first quarter of 2014 on a constant currency basis. Similarly to several sub-units in the safety and graphics division, 3M is realigning units in the company's electronics and energy division to better serve customers. The company consolidated all of its electronic display capabilities, as well as realigning offerings in semiconductor and electronic materials and components. These realignments will reduce costs and increase efficiency for 3M.

Healthcare

3M's healthcare division grew 6.2% on a constant currency basis from the first quarter of 2014 as compared to the first quarter of 2013. Developing market revenue in particular grew quickly, rising 10% on a constant currency basis. Drug delivery grew quickest among healthcare sectors for 3M. The company holds market leading positions in the following products in its healthcare division:

  • Skin and wound care
  • Infection prevention
  • Patient warming solutions
  • Oral care solutions
  • Coding and reimbursements software
  • Drug delivery
  • Food safety indicator solutions

Consumer

3M's consumer products division grew sales just 2.6% on a constant currency basis. Developing markets constant currency revenue increased 7% in the same period. Growth is being driven by increased market penetration of Filtrete filters and Command organizing hooks. Operating margin for the division decreased from 21.9% in the first quarter of 2013 to 21.2% for the first quarter of 2014.

Future Growth Potential

3M has benefited from the emergence of developing markets. The company is expecting about two-thirds of growth to come from developing economies over the next several years.

(click to enlarge)
Source: 3M Bernstein Conference Presentation, slide 10

As per capita income continues to increase in the developing world, 3M stands to benefit as more markets are opened to the company's products. Developing market infrastructure requires new signs, new businesses need more office supplies, and more middle class citizens will demand more healthcare. 3M is well positioned to fill rising demand through its expertise in manufacturing and its wide array of products.

3M will also boost growth through acquisitions. The company is planning to spend between $5 billion and $10 billion over the next 4 years on acquisitions. 3M is looking to acquire businesses in fast growing industries that can benefit from enhanced integration with 3M.

An example of the type of businesses 3M is looking to acquire is Treo Solutions. Treo solutions is a provider of data analytics to healthcare providers. Treo Solutions was acquired in April and added to 3M's Health Care divisions. The move gives 3M additional analytics tools to match with the company's expertise in healthcare. The move positions 3M to be a stronger player in the push to value based healthcare.

3M has a history of growing the business through acquisitions and innovation. The company has not announced what specific businesses it will be acquiring over the next several years. The majority of acquisitions will be funded with the company's future earnings and current $3 billion in cash on the balance sheet. Future acquisitions will be accretive to the company by allowing 3M to more quickly enter fast growing markets.

Continued progress in developed markets, strong growth in developing markets and acquisitions together will propel 3M's growth going forward. The company expects a 4% to 6% organic growth rate over the next several years.

Shareholder Return

Shareholders of 3M will likely see a CAGR over 10% for the next several years if the company's valuation multiples stay constant. 3M is expected to repurchase about $5 billion per year of outstanding shares. The company pays a dividend over 2%, and is expecting organic revenue growth of 4% to 6% per year. Shareholders of 3M can expect a CAGR of 11% to 13% from share repurchases (5%), growth (4% to 6%) and dividends (2%).

Valuation

3M is fairly valued based on a P/E ratio comparison with its peers.

Ticker

Company

P/E

MMM

3M Co.

21.06

GE

General Electric Company

19.32

HON

Honeywell International Inc.

19.32

DHR

Danaher Corp.

22.19

ABB

ABB Ltd.

20.25

ITW

Illinois Tool Works Inc.

23.62

ETN

Eaton Corporation

18.8

CMI

Cummins Inc.

19.42

ROK

Rockwell Automation Inc.

22.51

IR

Ingersoll-Rand Plc

31.57

DOV

Dover Corp.

16.25

Source: Finviz

The company's P/E ratio is also close to the S&P 500's P/E ratio of 19.47. 3M's average P/E ratio over the last decade is about 16. The company is currently trading at a ~30% premium to its average P/E ratio over the last 10 years.

Consecutive Years of Dividend Increases

3M has an amazing history of dividend payments. The company has paid dividends for the past 97 years, and increased its dividend each year for 56 consecutive years. 3M's impressive dividend history shows how long the company has been able to grow profitability and reward shareholders in the process.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. (Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2)

Dividend Yield

3M's current dividend yield of 2.35% ranks it at 56 out of 112 businesses with 25-plus years of dividend payments without a reduction. The company's dividend yield is greater than S&P 500's dividend yield of 1.86%.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. (Source: Dividends: A Review of Historical Returns)

Payout Ratio

3M's payout ratio is just under 40%. The company's payout ratio ranks it at 58 out of 112 businesses with 25-plus years of dividend payments without a reduction. 3M's lower payout ratio gives it some room to increase dividend payments faster than overall company growth.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. (Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3)

Long-Term Growth Rate

3M has managed to grow revenues per share at 6.21% per year over the last decade. The company ranks at 39 out of 112 businesses with 25-plus years of dividend payments without a reduction. 3M's solid growth is a reflection of the company's efficient use of capital.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. (Source: Rising Dividends Fund, Oppenheimer, page 4)

Long-Term Volatility

3M has a long-term standard deviation of 22.75%. The company's fairly low standard deviation ranks it at 28 out of 112 businesses with 25-plus years of dividend payments without a reduction.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. (Source: Low & Slow Could Win the Race, page 3)

Conclusion

3M is an extremely high-quality business with a long history of growth, innovation and rewarding shareholders. The company is a Top 25 stock based on the 8 Rules of Dividend Investing. Long-term shareholders of 3M will likely be rewarded with above market returns resulting from organic growth, dividends and share repurchases.

Source: 3M: 'Post-It' As A Great Business, Or Is It Scotch Taped Together?