One of the absolute earliest memories I'm able to recall from my childhood entails sitting on the kitchen floor of our house, working on an arts and crafts project, with a dispenser of 3M's Scotch Tape in my hands. Though this was nearly three decades ago, I still vividly remember the red-and-black checkered design on the side of the tape dispenser, a sight I've become quite accustomed to over the years. At that extremely early age, despite knowing nothing about an incredibly viable company called "3M", one thing I did know was that fascinating and downright useful product was pretty great at making things stick together. It's a product I still use regularly today.
The 3M Company (NYSE:MMM) is a diversified technology company that dabbles in many businesses, including transportation, health care, consumer and office, safety, security and protection services, display and graphics, car care products, adhesives, optical films, electronic services and much more. 3M, incorporated in 1929, was formerly known as the Minnesota Mining and Manufacturing Company (hence, the three "Ms") and now produces over 55,000 products and employs 84,000 people. Its products are available in over 200 countries worldwide.
3M sports a market cap of $59 billion, a trailing P/E of 14, a forward P/E of 12.15, a PEG ratio of 1.26, a P/S ratio of 2.0, $30 billion in annual revenue, $3.7 billion in cash on hand, $5.2 billion in debt, a beta of about 0.85, a dividend yield of 2.8% and a payout ratio of 37%. 3M has been raising its dividend annually for more than 50 years and this trend does not appear to be in jeopardy for the foreseeable future. The stock is up just under 4% YTD and has posted much better returns when compared to the Dow with a return of about 2% YTD.
3M's revenue has outpaced the industry average of 2.7% and revenues grew YOY, which helped boost EPS as well. The company has expanded its profit margin and ROE, while maintaining good cash flow from its operations and keeping a solid financial position for the future.
If you ask me, picking up shares of 3M anywhere below $80 per share would be a long-term bargain and I expect the company to outperform the overall market for the foreseeable future. All in all, I think it's an excellent long-term investment, especially if dividends are reinvested. I often watch for MMM to pass that 3% dividend yield mark as a sign the company looks ripe for the picking.
Let's take a look at the risks
Just like all other companies, an investment in 3M is not without risk. 3M faces competition from a number of other industrial conglomerates out there including General Electric (NYSE:GE), United Technologies (NYSE:UTX), Textron (NYSE:TXT), Emerson Electric (NYSE:EMR) and others. Most of these companies draw a significant amount of revenue from overseas business, therefore a fluctuating dollar against other currencies can pose a risk to 3M. However, due to the diverse nature of the business, industrial conglomerates are less vulnerable to economic upswings or downswings of a particular country - which helps maintain stability. Rising costs of raw materials also poses a risk to the industry's performance and can lead to inefficient operations, as well as changes to interest rates, taxes, tariffs or regulations imposed on the industry as a whole.
But still I think 3M looks attractive
3M's P/E ratio of 14 appears to provide a deep discount to the industry average of 15.5. Moreover, the industry overall looks quite stable and will benefit as the world slowly claws its way out from the recent global recession and begins spending more money once again.
3M is a company that has been around for roughly 85 years and is still going strong. Despite pushing through one of the worst economic recessions the world has ever seen, the company has continued to raise its dividend faithfully year after year, and give back a rather impressive amount of cash to shareholders. Furthermore, with such a modest amount of free cash flow being utilized to pay shareholders its strong dividend, it's clear to me 3M will be able to give dividend raises to faithful shareholders who hold onto their shares with relative ease for many years to come.
I feel comfortable adding to my position in MMM and reinvesting my quarterly dividend in order to assist in the power of compounding. 3M offers a highly diversified, relatively low risk investment option out there that handily will outperform treasuries and I feel the risk versus reward is fairly safe at this time, though I would certainly encourage picking up more shares on weakness.