Company Description: 3M Co. is a diversified global company that provides enhanced product functionality in electronics, healthcare, industrial, consumer, office, telecommunications, safety and security and other markets via coatings, sealants, adhesives, and other chemical additives.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
MMM is trading at a premium to all four valuations above. The stock is trading at a 63.9% premium to its calculated fair value of $72.18. MMM did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
MMM earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1916, and has increased its dividend payments for 55 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) or Treasury bond? 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:
- NPV MMA Diff.
- Years to > MMA
The NPV MMA Diff. of $12 is below the $500 target I look for in a stock that has increased dividends as long as MMM has. If MMM grows its dividend at 4.6% per year, it will take 11 years to equal a MMA yielding an estimated 20-year average rate of 3.22%. The 11 years is more than the 10 years maximum I like to see.
Memberships and Peers: MMM is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: General Electric Co. (NYSE:GE) with a 3.1% yield, Raven Industries Inc. (NASDAQ:RAVN) with a 1.6% yield and Carlisle Companies Inc. (NYSE:CSL) with a 1.2% yield.
Conclusion: MMM did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks MMM as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $78.61 before MMM's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 55 years of consecutive dividend increases. At that price the stock would yield 3.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 8.6%. This dividend growth rate is higher than the 4.6% used in this analysis, thus providing no margin of safety. MMM has a risk rating of 1.50 which classifies it as a Low risk stock.
MMM is the leader in many of the markets its serves with a culture that thrives on innovation. Its bottom-line focus and low-cost manufacturing have built a wide moat around its core businesses. The company has enjoyed strong historical earnings, dividend growth and free cash flow. In addition, MMM has relatively low debt and a strong balance sheet. The company has demonstrated the ability to generate strong returns on capital and will likely continue to do so.
Second-quarter results included improving organic sales growth in all its major geographic areas, with Western Europe enjoying its first positive organic growth quarter in two years. Its strategy of developing new innovative products will continue to capture global market share and lead to to increased operating margins. MMM is a great company with an excellent future, but with a fair value of $72.18 and a dividend yield less than my minimum, now is not the right time to add to my position.
Full Disclosure: At the time of this writing, I was long in MMM (0.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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