Dividend Aristocrats Part 48: 3M Co (MMM) by Ben Reynolds, Sure Dividend
3M (MMM) has paid dividends for 99 years without interruption.
The company has paid increasing dividends for 57 consecutive years. The company’s long dividend streak makes it one of only 17 Dividend Kings – dividend stocks with 50+ years of rising dividends.
Despite its long history of success, 3M has faced headwinds recently. The strong United States dollar combined with a global growth slowdown has sent 3M stock down 14% in the past year.
The sell-off has caused 3M’s dividend yield to rise to nearly 3%. The opportunity to pick up 3M stock at ~3% yields has only come during large sell offs in the last 20 years as the company’s dividend yield history image below shows:
Note: The red line shows 3% dividend yield
Getting To Know 3M
3M is one of the largest diversified manufacturers in the world. 3M’s market cap versus its largest competitors’ market caps is shown below for comparison:
- General Electric (GE) has a market cap of $285 billion
- 3M has a market cap of $86 billion
- Honeywell (HON) has a market cap of $75 billion
- Danaher (DHR) has a market cap of $58 billion
- ABB (ABB) has a market cap of $39 billion
- Illinois Tool Works (ITW) has a market cap of $30 billion
- Eaton (ETN) has a market cap of $22 billion
3M is the second largest publicly traded corporation in the diversified machinery industry.
3M operates in 5 segments. Each segment’s percentage of total operating income generated for 3M through the first 9 months of fiscal 2015 is shown below:
- The Industrial segment generated 31% of total operating income
- The Safety & Graphics segment generated 18% of total operating income
- The Health Care segment generated 22% of total operating income
- The Electronics & Energy segment generated 16% of total operating income
- The Consumer segment generated 14% of total operating income
The industrial segment is 3M’s largest based on operating income. The segment produces: adhesives, abrasives, tapes for industrial purposes, filtration systems, specialty additives, auto body repair solutions, and car DIY kits.
The safety and graphics segment produces respiratory, hearing, and eye protection solutions. It also creates reflective signs for traffic direction, ID cards like passports, roofing material, and building and architectural design safety solutions.
The health care segment produces skin and wound care products, infection prevention products, oral care, drug delivery inhalation systems, and coding and reimbursement software, among other health related products.
The company’s electronics and energy segment produces electrical vinyl rubber, flexible circuits, insulation tapes, and fiber and copper splicing, among other products.
The fifth and final consumer segment generates the least revenue for 3M, but is also the most familiar to US consumers. The consumer segment produces tape, home air filtration products, and Post It notes, among other products.
3M is diversified by product type as well as by geography. It is rare to find a company that can be so profitable in so many diverse industries.
3M’s broad success combined with its impressive dividend history shows clear evidence of a strong and durable competitive advantage.
3M’s Competitive Advantage
3M’s competitive advantage can be broken down into 4 distinct components: technology, manufacturing, global capabilities, and brand.
Source: 3M 2016 Outlook Presentation, slide 8
All of these strengths are supported by 3M’s culture of innovation. Google (GOOG) used to give its employees ‘20% time’ – they could spend 20% of their time on special projects. Google discussed this policy during its 2004 IPO. It has largely already faded away, just 12 years later.
Contrast this to 3M. 3M has given its employees a similar ‘15% time’… Since 1948. 15% time is still going strong at 3M nearly 70 years later.
3M has been ramping up its research and development spending in recent years. The company is planning to spend 5.8% of sales – $1.8 billion – on research and development in fiscal 2015 (and again, in fiscal 2016).
Source: 3M 2016 Outlook Presentation, slide 25
Ted Fischer summed up 3M’s competitive advantage well in a recent article on Seeking Alpha:
“(3M) is not merely a manufacturing company, it is a technology company. It is defined by continual innovation, by superior manufacturing competency that competitors struggle to duplicate, and by a consistent commitment to quality.”
At its core, 3M’s competitive advantage is culture based; the company’s advantage comes from its focus (and large spending) on innovation. The company’s other strengths flow from its innovation-centered culture.
3M’s Total Return Prospects
3M’s long-term growth goal is to generate 9% to 11% annualized earnings-per-share growth.
The company is expecting earnings-per-share growth of 7% to 12% in fiscal 2016 – in a challenging environment. Earnings-per-share are expected to grow just 0.8% in fiscal 2015 due to negative currency effects and a global growth slow down.
Of course, 1 year is not a fair time frame to judge growth. 3M has compounded earnings-per-share at just 4.5% a year over the last decade.
It doesn’t take a mathematical genius to realize that 4.5% annualized growth over the last decade is nowhere close to management’s projected 9% to 11% long-term earnings-per-share growth rate.
I believe a fair earnings-per-share estimate for 3M over the next decade is 7% to 11% per year. How the company will hit this growth is discussed below.
First, 3M is shoveling money to shareholders through share repurchases. The company has reduced its share count by 3% a year since 2010.
MMM has managed to grow revenue at 3% a year over the last decade. I expect the company to continue growing revenue at between 3% and 5% a year going forward.
3M is realigning its portfolio to provide better growth and higher margins going forward.
Source: 3M 2016 Outlook Presentation, slide 12
MMM is actively looking to either sell or spin-off its health information services business. This is likely the next large step in the company’s business reorganization.
The company’s focus on improvement will likely create margin growth which will boost earnings-per-share at between 1% and 3% a year over the next several years.
To summarize I expect earnings-per-share of 7% to 11% per year from the following sources:
- Share repurchases of 3% per year
- Revenue growth of 3% to 5% per year
- Margin improvements of 1% to 3% per year
This growth combined with 3M’s current ~3% dividend yield gives investors expected total returns of 10% to 14% a year going forward.
Recession Performance & Final Thoughts
3M weathered the Great Recession of 2007 to 2009. The company saw a downturn in earnings-per-share, but quickly recovered to new earnings-per-share highs by 2010.
The company’s earnings-per-share through the last recession and into the recovery are shown below:
- 2007 Earnings-per-share of $5.60
- 2008 Earnings-per-share of $4.89
- 2009 Earnings-per-share of $4.52
- 2010 Earnings-per-share of $5.75
MMM is not completely recession resistant, but is able to remain profitable during recessions. Even long-term downturns do little to put the company’s dividend at risk thanks to the company’s conservative ~50% target payout ratio.
3M is a high quality business with a long history of rewarding shareholders. It is currently a Top 25 stock based on