3M Is Set To Make Big Profits

Jun.19.14 | About: 3M Company (MMM)


Diversified industrials have seen increased momentum with the healing of the economy.

3M’s smart business strategy and efficient management are paving the path for future growth.

3M is set to generate substantial profits.

3M is a perfect investment for defensive investors.

3M (NYSE:MMM) has been generating substantial profits over the past few years with the healing economy. Last year remains the strongest year for 3M as its business strategies started to translate into significant profits. Furthermore, the company continues to implement its business strategies and strategic objectives. Its business strategy is focused on three key points, including investments in research, portfolio management, and business transformation, which are all interlinked with each other. The company further categorized its business strategy in Heartland, Push Forward, and Strategic Review. The Heartland division is utilizing multiple 3M technology platforms to strengthen technology position and chase adjacencies. Push Forward is to help market penetration on a worldwide base. In the Strategic Review, the company will review the performance of its business.

Portfolio management is its top priority and the heartbeat of the company. The company is spending a large amount of resources on research and development to produce innovative products, and it is also attempting to strengthen its product portfolio with acquisitions while disposing of non-core assets. The company is spending around 5.5% on research and development, and it is looking to expand this to 6% of sales by 2017. Along with focusing on generating organic growth, the company is following a plan to invest around $10 billion on acquisitions in the next three years. In addition, 3M is constantly seeking to enhance its operational efficiencies to give a boost to margins and earnings. All in all, its business strategy is working for the company as it is generating high double-digit growth in earnings as demonstrated in the chart below.

Figures in Million








Operating Income




Net Income




Earnings Per Share




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Source: Morningstar.com

Furthermore, 3M is seeking to accelerate its momentum. The company is looking to generate double-digit growth in earnings in the coming years. Recently, 3M has announced first quarter results with a double-digit growth in earnings led by all five business segments. One of the most optimistic signs for the company is its ability to generate strong organic growth, which symbolizes its smart business strategy and efficient management. In the past quarter, its health care business has generated 6% organic growth, and the Industrial and Safety and Graphics businesses generated 5% organic growth. On a consolidated basis, 3M has generated strong results in the first quarter, which allowed it to reaffirm full year growth estimates. It looks to post earnings per share of around $7.30 to $7.55 in 2014.

Cash position can reveal more facts about the company. With the solid growth in top and bottom line, its cash-generating potential is also enhancing year after year.

Figures in Million




Cash From Operations




Capital Expenditures




Free Cash Flow




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Source: Morningstar.com

The above table illustrates that the company's operating cash flows are far higher than its capital requirements. Thus, it has been generating massive free cash flow, which is allowing them to return a significant amount of cash to shareholders in the form of dividends and buybacks. Recently, the company announced a huge increase of 35% in its quarterly dividends, which marked its 56th consecutive increase. Its dividend payments are still far lower than its free cash flows. This huge gap allows it to work on buybacks. In the past quarter alone, it repurchased $1.7 billion of shares, and it is looking to repurchase around $4-5 billion of shares in 2014. Buybacks are very important as they reduce outstanding shares and results in distribution of profit and dividends to a smaller amount no of shareholders. We can expect another significant increase in dividend from 3M. The company has been generating massive free cash flows, and its focus on buybacks is also helping it to make a significant increase in dividends.

In Conclusion

3M's global footprint, diversified product portfolio, and the ability to penetrate in different markets set it to generate big profits. Its smart business strategy, efficient management, product innovation, strong organic growth and projected investments on acquisitions allow it to produce double digit growth in earnings over the next few years. Its dividend growth looks sustainable with the potential to generate strong free cash flows. Its fundamentals are moving nicely with the growth in earnings. I am not expecting any significant fall in the share price because everything is going in favor of 3M, including the stabilization of the globe's economy. Instead, the 3M stock will keep its momentum as the company is set to make double-digit growth in profits and will likely make a 57th consecutive increase dividend.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.