- The main fundamentals of the stock are still very strong. Recent and future acquisitions should aid the company in reaching its EPS and revenue goals.
- Earnings growth has lagged due to the strong dollar and weakness in emerging economies. However the company is investing on a large scale internationally which will improve sales going forward.
- The dividend growth has been very aggressive over the last 12 months. This stock is a true dividend aristocrat with a 50 year history of increased dividends.
- The longer the stock stays down from its highs, the more dividend growth investors will invest as the yield will increase.
The dividend yield of 3M (NYSE:MMM) could reach 3% soon as the stock is down more than 15% year to date. Picking up 3M with a 3% yield provides an excellent opportunity for income investors in my opinion as the company has raised its dividend for the past 52 years and even more aggressively in the past few years. For example, the company's expectation for its dividend pay-out in 2015 is $4.10 in total which is 20% higher than the 2014 pay-out figure. Furthermore, the fundamentals of this giant have not changed. It is still increasing revenues and earnings per share (EPS) at a nice clip every year so the $20+ drop in the share price this year should definitely not deter interested investors.
3M Stock Price Movement
The strong dollar (something the company cant control) plus some weakness in emerging economies definitely stifled sales growth for the company in 2015 even though operating margins continued to rise to almost 24% in the second quarter of this year (see chart). 55% of the company's revenues now come from international markets which in time will give this company ample diversification once emerging economies improve once more. I just feel that this stock has more to gain than other dividend aristocrats if we get dollar weakness from here because of its large diversification initiatives through country and product. Currency movements and weakness in emerging economies may stifle the share price in the near term but I can only see growth for 3M going forward. Let's discuss..
- Share Price Performance - Up 92% In The Last 10 Years Excluding Dividends - Pass
- Dividend Yield - 2.95%, 50+ year record of increasing dividends & a 3 year dividend growth rate of 15%plus - Pass
- Competitive Advantage(s) - Intangible assets, switching costs and cost advantage - Pass
- Revenues - $31.1 billion - Rising - Pass
- Growing Balance Sheet - $31.4 billion in Assets - Rising - Pass
- Profit Margin - 16% - Rising - Pass
- Resistant To Recessions - Sales recovered quickly in 2010 to $26.7 billion to surpass pre recession levels - Pass
- Free Cash Flow - $978 million projected for this year - Pass
All of the metrics above are in growth mode but what really attracts investors to this company is its profit margins which continue to grow year on year. There are a variety of reasons for this but the main one in my opinion is the company's spend on R&D every year (5.9% of revenues for the 1rst half of 2015). This huge budget is the company's main weapon as it can churn out new updates of products in a matter of years which makes competing with 3M very difficult. Furthermore the company now holds 100,000 patents and is diversified across 50,000 products which again protects this company from cheaper competitors. Spending almost $2 billion a year on R&D will be a requisite going forward as the tech sector gains traction. Companies who don't continuously invest in research and development in this sector wont be able to compete going forward. In fact, this company spawned an era of huge employee innovation as it has been paying employees for years (15% of their time) to innovate and create new ideas and products. Many products and patents have come from this initiative
The success of this company can also be attributed to the perceived low prices of their products. For example in the car industry, this company manufactures adhesives that bond metals and plastics together in the car manufacturing process. These adhesives are inexpensive compared with other parts but they are the most expensive in this sector as they must keep the bond intact for the lifetime of the respective car. Reliability is king in the car industry which is why these adhesives sell very well. Furthermore the company raises its prices every year to keep profits and revenues growing year on year. I think in one way the company gets away with these increases because of the cost of the products. A 5% increase on a much higher product for example would be noticed and questioned more rapidly.
On the income side, this company also looks very impressive. In fact, its average dividend growth rate is around 9% which means your dividend income would double every eight years on average. Furthermore I cant see 3M's dividend slowing down any time soon. Its current pay-out ratio is 0.51 which is well above its average but still gives the company ample room to keep growing its dividend. Its recent new acquisitions (Polypure for $1 billion and Ivera Medical for an undisclosed fee) should boost revenues going forward (4 to 6%) year over year through 2017. More acquisitions in the next few years should also boost EPS with the company projecting 9-11% annual growth from here. Furthermore the $20 million the company has earmarked for buybacks should also boost earnings per share going forward.
When you combine of all the above plus the huge jump that the dividend has taken in the last 12 months, I can not see this stock staying down for very long. Last year its dividend per share was $3.42 (see chart). This year it will be at least $4.10 which is a huge move and is bound to attract more dividend growth investors. This stocks yield is also trading very close to its 5 year high. If there is one thing we have learned from 3M, things will not stay this way.