This is the eighth in a series of articles that will take a look at the dividend kings; companies that have paid an increasing dividend for 50 or more years. So far, this series of articles has produced companies that range from small cap to large cap with varying 5-year dividend growth rates from 1% to 17%. I was surprised to find all kinds of companies in the list like Johnson & Johnson (NYSE:JNJ), a large cap company with dividend growth of 7%, and some other companies with dividend growth of less than 1%. I really expected all of these companies to be good investments, but some of them disappointed me, so on with the study. This article is about 3M Co. (NYSE:MMM) and why it's a dividend growth income investment, total return investment that has increased its dividend for 57 years making it a dividend King, and has in the last 41.8 months had fantastic total return. 3M Co. is engaged in the manufacture of industrial products and is a technology company. The Company operates through five segments. Its Industrial segment serves markets such as automotive original equipment manufacturer and automotive aftermarket, electronics, appliance, paper and printing, packaging, food and beverage, and construction. 3M Co. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of 3M Co. will be looked at in the following topics - The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
3M Co. passes 10 of 10 in Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
3M Co. is a large-cap company with a capitalization of $107.0 billion. The size of 3M Co.'s steady cash flow of $6.3 billion from its business allows it to have the staying power to pay its above-average dividend and to have plenty of cash for stock buybacks and company expansion. MMM is one of the largest companies in the industrial conglomerates group, second only to General Electric (NYSE:GE) with a capitalization of $302 billion. GE makes large industrial products like jet engines, and MMM makes over 19,180 smaller industrial products, so the two companies are not really direct competitors. 3M Co. has the muscle to handle any problem that occurs in its business.
3M Co. has a dividend yield of 2.63%, which is above average for the market. The dividend has been increased for 57 years, and its dividend is very safe. The payout ratio average over the last 5 years is 42%, which leaves plenty of cash to grow the business and for stock buybacks. 3M Co. is therefore a good choice for the dividend growth income investor. After paying the above average dividend, there is still cash remaining for business expansion.
3M Co.'s yearly cash flow is good at $6.3 billion, which leaves enough cash after paying its dividend for business expansion and stock buybacks. For 2016, 3M Co. is expected to continue its aggressive buyback of its stock. In the last quarter, 3M Co. bought back $1.2 billion of its shares.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income, and I need 1.9% capital gain in addition for a yearly distribution of 5%. 3M Co. has a CAGR of 9% (from S&P Capital IQ) easily meeting my requirement. Looking back five years, $10,000 invested five years ago would be worth $21,100 today (from S&P Capital IQ). This makes 3M Co. a fair investment for the dividend growth income investor and a good choice for the total return investor.
For 3M Co., S&P Capital IQ has a three star rating or hold with a one-year price target of $175.00. This makes 3M Co. slightly underpriced at present and with projected business growth of 9% over the next year. In the long term, 3M Co.'s above-average dividend and its growing business in the industrial conglomerates sector is a good choice for the dividend growth income investor.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. 3M Co. had much better total return than the Dow baseline in my 41.8-month test period. I chose the 41.8-month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015, and the slightly negative year of 2016 YTD to see how the company does in good and bad markets. This above average total return of 93.54% for 3M Co. compared to the Dow baseline of 32.79% does make MMM very appropriate for the total return investor. 3M Co. has done better than the economy over the test period and has a dividend growth of 14.84% over the past 5 years. In 2013, a good year at MMM beat the Dow total return at 49.83% compared to the Dow base of 27%. Year to date, total return is 12.27% ahead of the Dow's small loss so far this year. The dividend is above average at 2.63%, and has been increased for 57 years, making the company a dividend king.
Dow's 41.8-month total return baseline is 32.79%
41.8-month total return
Difference from Dow baseline
Yearly dividend percentage
Last Quarter's Earnings
For the last quarter, 3M Co. reported earnings on April 26, 2016, that beat expected earnings at $2.05 compared to last year at $1.95 and expected at $1.92. Revenue beat expected by $80 million, and total revenue decreased by 2.2% year over year to $7.41 billion. This was a good report showing the decreased revenues while still making the increased earnings goal. This leaves enough cash remaining after paying the $1.11 dividend for business expansion. The company also bought back $1.2 billion in shares during the quarter. Earnings for the next quarter will be released in late July 2016, and are expected to be at $2.07/share compared to last year at $2.02/share, a slight increase. During the last earnings call, management projected yearly earnings at $8.10-$ 8.45, or 7%-10% increase Y/Y. They also said they have a 3% headwind due to the strong dollar, but margins increased 1% as a positive.
Company Business Overview
3M Co. is engaged in the manufacture of industrial products and is a technology company. The Company operates through five segments. Its Industrial segment serves markets, such as automotive original equipment manufacturers and automotive aftermarket, electronics, appliance, paper and printing, packaging, food and beverage, and construction. Its Safety and Graphics segment serves markets for the safety, security and productivity of people, facilities and systems. Its Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems, and food manufacturing and testing. Its Electronics and Energy segment serves customers in electronics and energy markets, including solutions for electronic devices, electrical products, telecommunications networks, and power generation and distribution. Its Consumer segment serves markets that include consumer retail, office business to business, home improvement, drug and pharmacy retail, and other markets. The good news with the business is the company's positive correlation to the growing economy which in effect directly drives earnings, MMM likes a strong growing economy. 3M Co. is a steady growing company that should be considered for the dividend growth income investor and the total return investor. 3M Co. manufactures over 19,180 individual products (from company website) and does not really have any direct competitor in this wide range of products from health care to chemicals.
Takeaways and Recent Portfolio Changes
3M Co. is a good choice for the dividend growth income investor, increasing its dividend for 57 years and growing the dividend in the future, and is slightly underpriced right now. 3M Co. beat strongly the total return compared to the Dow average and is a good choice for the total return growth investor based upon past experience and future projections. The business is growing at 9% CAGR and 3M Co. is in the industrial conglomerates sector which seems to do well even in this slow 2% growing economy. The Good Business Portfolio guidelines does not have an open slot right now, but will definitely consider 3M Co. because of its great total return when an open position occurs. If you don't already have a position in the industrial conglomerates sector, MMM may be worth a position for your dividend growth income segment or total return segment. This study has found a winner better than some of my present holdings.
Sold some covered calls on Harley-Davidson (NYSE:HOG) - sold July 45s. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up, so I can sell the calls again in the same month for a Double. Sold some covered calls on HOG, July 47.5s before Brexit. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up, so I can sell the calls again in the same month for a Double. HOG is not performing well and may be trimmed by direct sales or letting my covered calls be exercised if the price is above the strike price.
On June 24, bought Eaton Vance Enhanced Equity Fund II (NYSE:EOS), increasing it to 6.93% of the portfolio. I could not decide what company to buy, so I bought more of my only fund.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson & Johnson is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 8.0% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Eaton Vance Enhanced Equity Fund II is 6.9% of the portfolio, and Walt Disney (NYSE:DIS) is 6.9% of the portfolio; therefore, BA and JNJ are now in trim position with Altria Group Inc., Home Depot, Eaton Vance equity Fund II, and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016, deferred costs were $141 million and decreasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen. It is estimated that 14 787 planes ("All Things 787" website) can be delivered in June exceeding the goal of 12 planes.
For the total Good Business Portfolio, please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarter's performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, JNJ, DIS, MO, OHI, EOS, GE, HOG.
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.