IS 3M’S DIVIDEND GROWTH A SUFFICIENT REASON TO BUY AND HOLD?

Overview

3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an American conglomerate, specialising in various sectors including industrial products, healthcare, and consumer goods. Founded in 1902, the conglomerate is headquartered in Minnesota, United States. 3M is a prominent company in the field, placed 96th in the Fortune 500 rank1. It currently has approximately 95,000 employees and the Chief Executive Officer, Chairman and President is Mike Roman. According to its mission statement2, the company places emphasis on aligning innovation with the achievement of social and environmental sustainability. 

Financial Information 

Market CapEVRevenue Forward P/EEBITDAEV/RevenueEV/EBITDAForward Annual Dividend Yield
107.85B120.47B34.73B17.2910.07B3.4711.963.21%

Data source: Yahoo Finance3

Dividend Information

Graph 1 – Dividends per share

Data source: Financial Times4

With 63 years of consecutive dividend increases and over 100 years of paying dividends to its shareholders5, 3M is rightfully classified as a Dividend King. Dividends are one of the top priorities of the company; as the Chief Executive Officer, Mike Roman, stated “our first priority is always investing organically between R&D and CapEx because we think that’s the biggest return for our money. The second is dividend.”6 Dividends per share increased by 2.08%, while earnings per share(EPS) leapt by 18.4% on a YoY basis7,  and there is a clear steady upward trend to the dividends amount per share that 3M offers. The strong performance of the company with regards to its dividends is remarkable especially places in the context of the sector within which it operates, where only a few companies pay dividends to their shareholders. The dividend growth of the company is supported by the large free cash flow it generates. Indicatively, during the period 2016 – 2020, 3M raised a free cash flow of $18.4B (16% of its current market capitalisation), while spending $15.4B in dividends8. With a forward annual dividend yield of around 3.2%, 3M outperforms the dividend yield of the S&P 500 Index, offering an almost double yield compared to an average S&P 500 stock9

Competition 

Prominent competitors in the area of industrial conglomerates are General Electric (GE), Danaher (DHR), Tyco International (TYC), and Carlisle Companies (CSL)10. The greatest areas of competitive advantage are intellectual property and technology11. A key differentiator between 3M and competitors in the sector is the emphasis 3M places on researching and developing new products, investing $1.9B this year, which accounts for around 6% of its sale profits, in R&D, leading to the development of 3,780 product patents12. This strategy not only ensures sustained growth, but also increases profitability, with new products (developed within the past 5 years) contributing a substantial 30% – 32%13 to the company’s annual revenue. Additionally, 3M utilises 51 core technology platforms to develop its products14. This factor is, in my opinion, a major indicator of the consistency and prospects of 3M as an investment opportunity. Furthermore, manufacturing assets within 3M are shared amongst different businesses, leading to an advantage compared to companies competing on production costs15.  

Revenue Distribution 

Graph 2 – Net sales in 2020 ($M)

Data source: Statista16

Projections and Risks

The company operates in a variety of different sectors, creating over 60,000 different products17. The products can be classified under 4 key segments: safety and industrials, transportation and electronics, healthcare, and consumer goods18. It also has a global presence, offering 51% of its products to the Americas, 30% to Asia Pacific, and 19% EMEA countries19.  This diversification means that the underperformance of one segment at a given period can easily be offset by more favourable conditions for a different segment. For example, low sales in the Industrials and Transportation segments during the pandemic were counterbalanced by an increase in the sales of healthcare products20.

A factor that can adversely affect 3M’s ability to maintain its production levels is the scarcity of materials necessary for the manufacturing of industrial products, due to the disruptions the pandemic has caused to supply chains, and primarily the constraints to the supply of semiconductors21. This is mitigated by the fact that as a large scale company, 3M is better placed than competitors to secure raw materials at a low cost22.

Moreover, for a company operating in several sectors, with ever changing regulatory landscapes, involvement in legal proceedings over product defects is unavoidable. An example is a device developed by 3M and used for joint replacement surgical procedures that has been the subject of several legal claims by patients who experienced infections23. Litigation and legal liability encompass substantial costs for the company. Another example are the claims filed against 3M with regards to the safety of earplugs for military use. Since 2018, 3M has “shelled out $1.7B in litigation charges”24, which can adversely affect the trust investors investors place in the company.

The impact of the financial implications of the pandemic on the performance of the M3 stock is also noteworthy. The company has announced that it forecasts a FY 2021 65 – 80 cents per share logistics and materials headwind, compared to its previous expectation in the range of 30 – 5025. On the contrary, higher demand for medical products, primarily respirator masks, led to a 11.4% organic growth in the safety and industrials segment26. Organic growth is supplemented by acquisitions, an example being the acquisition of Acelity for $7B27.

Graph 3 – Earnings per share

Data source: Financial Times28

A recent valuation conducted by Forbes estimates a far value of $196 for the 3M stock29. The current price of the stock that is traded at $186 is the result of a 5.4% drop during the last 5 trading sessions. In sharp contrast to its exceptional dividend growth, with an 8% overall gain year to date the 3M stock underperforms compared to the 22% increase of the S&P 500 during the same period30. However, some analysts have concluded that the “above-annual dividend yield and annual dividend growth”31 suffice as a reason to consider 3M a hold stock; and I believe they are correct. In fact, as pointed on an analysis published on Seeking Alpha, 3M is the most undervalued stock amongst dividend kings. The same analysis points out that only 3 stocks in the industry have a yield of over 3%: Coca-Cola, Emerson Electric, and 3M32.

In spite of the fluctuations of its stock price, I am optimistic about the long-term growth potential of 3M. Given the overall sustainable performance of the conglomerate, and its consistent dividend increase, as well as the forecasted continuation of dividend increase, I consider 3M a good long term investment opportunity for income investors as a buy-and-hold stock. 

Aida Marinaki, King’s College London


References

1. 3M Company Profile, Fortune https://fortune.com/company/3m/fortune500/

2. Who we are, 3M Company https://multimedia.3m.com/mws/media/1393026O/2017-sustainability-report-who-we-are-section.pdf

3. 3M Company (MMM) valuation measures, Yahoo Finance https://uk.finance.yahoo.com/quote/MMM/key-statistics/

4. 3M Co, MMM:NYQ financials, Financial Times https://markets.ft.com/data/equities/tearsheet/financials?s=MMM:NYQ

5. Dividend Aristocrats In Focus: 3M Company, Bob Ciura https://www.suredividend.com/dividend-aristocrats-mmm/

6. 3M: Dividend King Back In Action, Seeking Alpha https://seekingalpha.com/article/4448419-3m-dividend-king-back-in-action

7. n 4

8. https://www.forbes.com/sites/greatspeculations/2021/09/08/analyzing-3m-companys-dividend-growth-potential/?sh=3ef47dda22d3

9. Analyzing 3M Company’s Dividend Growth Potential, David Trainer https://www.fool.com/investing/2021/03/06/is-3m-a-great-dividend-stock/

10. Forbes Earnings Preview: 3M, Forbes https://www.forbes.com/sites/narrativescience/2012/01/23/forbes-earnings-preview-3m/?sh=be23f373f774

11. n 5

12. 3M Research and Development, 3M Comapny https://www.3m.com/3M/en_US/company-us/about-3m/research-development/

13. What Strengths Differentiate 3M Company from the Competition?, Shannon Black https://marketrealist.com/2016/06/strengths-differentiate-3m-company-competition/

14. n 2

15. n 13

16. 3M Net Sales by Segmant 2020, Statista https://www.statista.com/statistics/733591/3m-net-sales-by-segment/

17. Why 3M Company Finds It Hard to Keep Up With Investor Expectations, Neha Chamaria https://www.fool.com/investing/2018/10/24/premium-3m-company.aspx

18. 3M Co, MMM:NYQ profile, Financial Times https://markets.ft.com/data/equities/tearsheet/profile?s=MMM:NYQ

19. Is 3M A Good Dividend Stock? No, Dividend Yield Is Not Attractive Enough, Seeking Alpha  https://seekingalpha.com/article/4450674-3m-good-dividend-stock

20. Here’s Why 3M Stock Looks Undervalued At $175, Forbes https://www.forbes.com/sites/greatspeculations/2021/03/02/heres-why-3m-stock-looks-undervalued-at-175/?sh=4e0f92441ef8

21. n 6

22. n 13

23. n 19

24. What’s Happening with 3M Stock?, Forbes https://www.forbes.com/sites/greatspeculations/2021/06/08/whats-happening-with-3m-stock/?sh=7e5a12bc108e

25. 3M Q2 2021 Earnings Call Transcript, Michael Roman and Monish Patolawala https://s24.q4cdn.com/834031268/files/doc_financials/quarterly/2021/Q2-2021-Transcript.pdf

26. n 5

27. ibid

28. n 4

29. n 24

30. What’s Next for 3M Stock after a 5% Fall in a Week?, Forbes https://www.forbes.com/sites/greatspeculations/2021/09/09/whats-next-for-3m-stock-after-a-5-fall-in-a-week/?sh=7a1ff20e3d60

31. n 5

32. Dividend Kings Analysis: 3M Is The Most Undervalued, Seeking Alpha https://seekingalpha.com/article/4378831-dividend-kings-analysis-3m-is-undervalued

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