3M's Long Dividend History Not Enough for a Buy

3M Co (MMM) (alt.1, alt.2).

Below are some highlights from the above linked analysis:
 

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MMM is trading at a discount to all except 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, MMM is trading at a 19.3% discount. A Star is added since MMM is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

MMM earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1916 and has increased its quarterly cash dividend payments for 50 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA.

MMM earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. In effect, if you invested equal amounts in a MMA earning of an average of 4.61% for 20 years and MMM stock with a dividend yield of 2.88% and growing at 4.2% annually, you would have $1,556 less in MMM stock per $1,000 invested.

Other: MMM is a member of the S&P 500, is an Achiever and an Aristocrat. S&P noted that historically the company provides stable earnings and dividends. MMM enjoys a leading position in many of the end markets that it serves, a strong balance sheet with a relatively low amount of debt, and free cash flow that has averaged about 95% of net income over the past 10 years.

Conclusion: MMM earned a Star in the Fair Value section, earned a net zero Stars in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 1 Star. This rates MMM as a 1 Star-Very Weak stock.

Using my [D4L-PreScreen.xls] model I determined the dividend growth rate would have to average 9.8% for MMM to generate a NPV of MMA Differential of $3,000 that I look for from a company that is both an Achiever and an Aristocrat. With the current dividend and an estimated growth rate of 4.2%, the share price would have to be $44.54 before I would consider initiating a position in MMM.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Disclosure: At the time of this writing, I do not own shares of MMM (0.0% of my Income Portfolio).

Comments

[danS]

3M EPS have increased about 8 fold in the last 25 years. This corresponds to an average EPS growth of about 8% per year. Dividend growth has risen at almost the same rate NOT at a 4.2 % rate you base your calculations on.

The return on 3M stock (taken from yahoo business) including dividend reinvestment has been 8 fold in the last 20 years (the P/E of 3M was the same or higher 20 years ago than it is now - in fact 3M is trading at a lower P/E now then it has in the last 27 years) which corresponds to a return of about 11% per year which is much better than the return on treasuries of 4.6%.

3M's return is typical of the blue chip stocks in the S&P 500. How you can rationalize the purchase of fixed rate securities as a long term investment at current stock valuations completely escapes me. It makes no sense. It would only make sense if you honestly believe interest rates are going to climb to 10 to 12% in the next few years