3M Company (MMM), formerly known as Minnesota Mining and Manufacturing Company, is a long time member of the Dow Jones Industrial Average. MMM make a broad array of products ranging from the well known Scotch tape products and Post-it note products to computer privacy screens and transdermal drug delivery systems.
MMM has a market capitalization of $57.4 billion and an enterprise value of $59.0 billion, suggesting essentially no leverage. MMM has a strong track record of paying dividends. For 2010, its payout ratio to net income was 37% and its payout to operating cash flow was 29%. These low ratios suggest that MMM can continue to raise its dividend even if it suffers from periods of low underlying performance.
Highly diversified business portfolio with solid margins
MMM operates in six business segments: Industrial and Transportation; Healthcare; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications. MMM had about $26.7 billion in revenue in 2010.
|Business Segments||2010 Revenue||2010 Operating Income||2010 Operating Margin|
|Industrial and Transportation||8,581||1,799||21.0%|
|Display and Graphics||3,884||946||24.4%|
|Consumer and Office||3,853||840||21.8%|
|Safety, Security and Protection Services||3,308||707||21.4%|
|Electro and Communications||2,922||631||21.6%|
|Corporate and other||-407||-369||NA|
The above table shows that MMM is relatively well distributed across its six segments, which also all have relatively even operating margins,except for Healthcare. Unfortunately, Healthcare posted the lowest revenue growth from 2009, while Display and Graphics had the highest.
MMM provides a 2.8% dividend yield
MMM's estimated forward dividend yield is 2.8% based upon a recent closing price of $81.87 and the author's projected annual dividend of $2.275. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.
|Type||Ex-Dividend Date||Quarterly Dividend ($ per share)||Change on prior year|
Source: Author estimates, Yahoo!Finance
Current dividend yield relatively high to recent history
The above table shows that MMM has consistent but low dividend growth. Its most recent double digit growth percentage increase occurred back in 2005. The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.
Created from data from Yahoo!Finance
The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.
Created from data from Yahoo!Finance
The above chart shows that MMM has significantly underperfored its dividend increases, suggesting that its future growth opportunities are not as compelling. Furthermore a quick look at the dividend discount model (DDM) suggests a potential overvaluation. However, it is always important to recognize that the DDM can be conservative. Obviously a company with no dividends would record a value of zero with the DDM. In this case, one suspects the low payout ratio is holding it back. Simply increasing the payout ratio could double the dividend and still provide a margin of safety.
Relatively low valuation reflects lower growth
MMM currently has a forward P/E of 13.0x based on a forward EPS estimate of $6.29 per share, which represents a 6.3% increase from the 2009 result. With recent dividend growth ranging from 2-4%, this is not a an unreasonable P/E; however, it is also not a deeply compelling purchase. However, it would also be important to do a free cash flow analysis for MMM since it reinvests a significant amount of money into the business so dividends are not the only consideration.
The second large piece of analysis is around how MMM manages its stable of brands and products. In this respect, MMM is similar to several consumer products companies including Procter & Gamble Company (PG), The Clorox Company (CLX), Colgate-Palmolive Company (CL) and Kimberly-Clark Corporation (KMB) and pharmaceutical company Johnson & Johnson (JNJ). It also raises the question of which of these companies offers the best opportunity for an investor looking at companies in this space. The following table shows the comparison.
|Ticker||Name||11/15 Close||Forward EPS||Forward PE||EPS Growth|
|PG||Procter & Gamble Company (The)||63.56||4.19||15.2||9.3%|
|CLX||Clorox Company (The)||65.00||4.08||15.9||8.3%|
|JNJ||Johnson & Johnson||64.99||5.24||12.4||5.4%|
This table shows that MMM valuation discount is most likely due to lower growth rates. The following table shows that MMM has one of the lower dividend yields with the lowest estimated growth.
|Ticker||Forward Dividend||Forward Yield||Dividend Growth|
Source: Yahoo! Finance and Author estimates.
So for investors to be excited about MMM relative to these other companies, they would have to develop a higher view of MMM's ability to deliver capital appreciation to offset the somewhat less exciting dividend prospects. However, one key consideration would be to compare payout ratios. Having previously analyzed PG, I know that it has a higher payout ratio (much higher if one includes stock buybacks) than MMM.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.