Dogs of the Dow: One to Ditch and One to Snatch

Includes: AA, MMM
by: Larry Meyers

Can I hear three cheers for 3M (NYSE:MMM)? You’d think a hundred-year-old company’s growth days were behind it, but one walk through a supermarket or even your own home will turn up dozens of 3M products. Many consumers are probably only familiar with 3M because of those “consumer staples” they naturally buy. But as it turns out, 3M also has vibrant businesses in health care, transportation, electronics, and manufacturing. That’s just the tip of the iceberg. 3M is a truly diversified conglomerate, the kind of all-weather stock that not only belongs in the Dow, but in your portfolio, along with other large cap growth stocks.

Speaking of growth, analysts predict 8% earnings growth this year, and 12% annually over the next five. And this year’s growth should come with 12% revenue growth. Some may even consider it a large cap value stock, as it trades at almost the same P/E multiple of 15 that Johnson & Johnson (NYSE:JNJ) does, yet is growing faster. 3M’s diverse product line and venerable history are some reasons for its $4 billion in free cash flow each of the past two years, $3 billion the year before, and $3.6 billion in the last 12 months. The company has $300 million in net cash, but dig into that number and you’ll find $4.4 billion in cash on its balance sheet, allowing for further R&D and expansion. Add in a 2.4% dividend payout and you’ve got an all-around winner.

The same can’t be said for Alcoa, Inc (NYSE:AA). It’s another century-old company, and while it is a powerhouse in the world of aluminum, that lack of diversification isn’t serving the company well. Whereas 3M’s product mix resulted in only an 8% loss of revenue in FY 2009 due to the recession, poor Alcoa suffered a 44% revenue hit. 3M bounced back 17% in 2010 and Alcoa only 15%. MMM still put up a $3.2 billion profit in 2009, while Alcoa put up a loss. In 2010, 3M profits soared 30% to $4 billion, and Alcoa just eeked out a $254 million profit.

Alcoa’s balance sheet shows $7.3 billion in net debt, although the cost of that debt is only about 5%, and the company was cash flow positive in 2010 to the tune of $1.2 billion. But that was after 2008 saw negative cash flow of $2.2 billion and $300 million in 2008 and 2009, respectively. Might Alcoa come roaring back? Anything is possible, but I’m not interested in waiting around and only receiving a 0.80% dividend while I do. Alcoa is a sell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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