3M (MMM) is a diversified technology company with a global presence in the following businesses: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications. 3M’s culture of creative collaboration inspires a never-ending stream of powerful technologies that make life better. With $27 billion in sales, 3M employs about 80,000 people worldwide and has operations in more than 65 countries. 3M’s brands include Scotch, Post-it, Scotchgard, Thinsulate and Scotch-Brite.
Century Of Innovation
In 1902 Minnesota Mining and Manufacturing was founded when five businessmen set out to mine a mineral deposit for grinding-wheel abrasives. The deposits proved to be of little value so the focus shifted to sandpaper products. After years of struggle, innovations began to produce successes, and the company paid its first dividend in 1916. A dividend has been paid each subsequent year as the business grew and prospered over the decades. The dividend was boosted by 5% to $2.20 per share in 2011, marking the 53rd consecutive dividend increase. The sticky dividend currently yields an attractive 2.9%.
While 3M is 109 years old, the company continues to churn out new products like a young startup which explains why 31% of 3M’s 2010 revenues came from products that were developed during the past five years. Management is committed to innovation and spent $1.4 billion or 5% of sales in 2010 on research and development to drive organic growth and new products. 3M’s broad technology base and collegial corporate culture encourages networking among researchers in busy labs. This results in the development of valuable products to meet customer needs. 3M rewards employees for outstanding work by setting individual expectations and quantifying research efforts to ensure R&D money is spent wisely. Over the past century, innovation has become a 3M hallmark with the company inventing everything from masking tape to Post-it Notes.
In 2006, 3M embarked on a journey to move, gradually but permanently, to a higher growth regimen to create value for shareholders and opportunities for employees. Despite unprecedented global challenges during the past five years, 3M’s profitable operations have generated an average 30+% return on shareholders’ equity.
| Fiscal Year September | 4-YR CAGR |
2010 |
2009 |
2008 |
2007 |
2006 | |
Sales (000,000) | 3.8% | $26,662 | $23,123 | $25,269 | $24,462 | $22,923 | ||
Net Income (000,000) | 1.5% | $4,085 | $3,193 | $3,460 | $4,096 | $3,851 | ||
EPS | 2.7% | $5.63 | $4.52 | $4.89 | $5.60 | $5.06 | ||
Dividend | 3.4% | $2.10 | $2.04 | $2.00 | $1.92 | $1.84 | ||
Profit Margin |
| 15.3% | 13.8% | 13.7% | 16.7% | 16.8% | ||
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Robust Cash Flow
Free cash flow increased from $2.7 billion in 2006 to $4.1 billion in 2010. 3M’s converts 100% of earnings to cash, which is a high quality company hallmark. Through the first half of 2011, 3M has returned $2.1 billion to shareholders through $1.4 billion of share repurchases and $783 million in dividend payments.
Second Quarter Results
3M posted record second quarter sales of $7.7 billion, up 14% over the prior year period. Sales increased in all geographic regions with Europe up 24%, Latin America/Canada up 20%, Asia Pacific up 11% and the U.S. up 8.7%.
Five of the company’s six business segments expanded sales in the quarter with particular strength in 3M’s largest segment, Industrial and Transportation at 25% and Safety, Security and Protection Services at 20%. Direct and indirect business disruption resulting from the March earthquake in Japan reduced second quarter sales growth by an estimated 2.4%. Display and Graphic sales declined 7% hurt by a 22% decline in optical systems for LCD TVs as consumers pulled back their purchases in the wake of economic uncertainty. Net income increased 3.5% to $1.16 billion or $1.60 per share, which is up 4% thanks to 3M’s share buybacks.
Although the economy has slowed, 3M expects the economy to accelerate again as oil and other commodity prices stabilize in the back half of 2011. 3M raised the low end of its 2011 EPS forecast by five cents and now expects EPS of $6.10 to $6.25. Management stuck to their organic sales volume growth guidance of 6%-7.5% with currency expected to add another 3.5%-4.5% and acquisitions adding 3%-4%.
Long-term investors may find this high quality, innovative company with robust cash flows and profitable operations to look MMM good at current valuation levels. Buy.
Disclosure: Hendershot Investments holds a long position in each stock presented. The content in this article should not be taken as investment advice or construed as a recommendation to buy or sell any security. Ideas expressed may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that investments discussed will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned is available upon request.
