“Can I get a sticky?” is a common refrain overheard in offices and homes across the country. The Post-it note was an attempt by 3M to develop a stronger adhesive gone awry. The inventor, Dr. Spencer Silver, did not give up endeavoring to find a market for his new discovery when a colleague, Art Fry, started using the notes as a bookmark for his hymn book. The “press n peel” was launched in 1976 and after subsequent failures was rebranded as the Post-it Note in 1980. Surprisingly- the intrigue escalated a few years later when Alan Amron claimed to be the actual inventor of the Post-it Note. Although a lawsuit between 3M and Amron was settled in 1997, one cannot argue about 3M’s most well-known consumer brand or the importance “sticky notes” play during a normal day.
3M Company is headquartered in Minneapolis, Minnesota and is listed on the New York Stock Exchange under the symbol MMM. The company commenced operations in 1902 and labels itself as a diversified technology company. 3M Company is divided into four separate operating segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. 3M employs 96,000 people with manufacturing plants in 29 states and over 30 countries across the globe.
3M’s consumer business manufactures the most familiar products to shoppers. Looking around my house- we own Post-it Notes, Scotch tape, N-95 masks (widely sought after with the continuing Covid-19 pandemic), and Scotch brite scouring pads. We use these products on a weekly basis and while shopping do not look for generic brands to save a few dollars. Check around your home and see how many products you have made by 3M- and while looking for the previous items, make sure you have your first aid kit stocked with 3M manufactured Ace Bandages. These consumer goods are a few reasons why Morningstar considers 3M to be a wide moat corporation. Let’s take a look to see if MMM is a good investment entering June, 2020. My screening criteria is based on Earnings/Revenue, Dividend/Yield, P/E Ratio, and the Payout ratio.
Earnings/Revenue
3M Company is gigantic with nearly a $90B market cap and is listed on the Dow Jones Industrial Average. Earnings and sales revenue are not dynamic, as expected with a corporation this size, but demonstrate gradual increases on an annual basis. Earnings per share are growing at a 1.8% combined annual growth rate (cagr) over the past 5 years. The chart shows a steep decline in diluted eps from 2018 to 2019.
A major reason for the earnings drop was diminished demand in the Safety and Industrial segment along with a drop in the Transportation and Electronics business. Combined with revenue softness in China- growth in 3M’s Consumer and Health Care segments could not overcome the revenue decline. Sales revenue display a positive 1.5% cagr over the last 5 years and Q1 results indicate an increase of 2.7% year over year bolstered by a 20% gain in the Health Care business.
Dividend/Yield
3MM is a dividend king- raising its payout to stockholders for the past 61 years. The commitment to rewarding MMM shareholders commenced before the election of John F. Kennedy. The investor has been rewarded by holding 3M shares for the long term. The 5-year cagr of the dividend is 8.9% and the 10-year rate is 11.9%. Two shares of 3M pay out 1,200 Post-it notes in dividends on an annual basis.
Currently, MMM is yielding 3.75%, above my requirement of 2.5%. In my opinion- the stock is in the sweet spot for a dividend king. The 3.75% yield is at a 10-year high making a purchase more appealing. Yield is calculated by dividing the divided by the stock price, which means the current price of MMM against the dividend has not been seen for a decade.
Price/Earnings Ratio
The Price to Earnings Ratio is found by dividing the stock price by the last 12 months of earnings per share. A high PE means the stock price is high compared to earnings, with a low PE showing more value. I look for two aspects of the PE ratio while screening out stocks prior to making a purchase. Is the current PE under 20 and where is it compared to the last decade? The historical PE ratio for the 3M Company is currently at a 4-year low. 3M displays a PE ratio under a 10-year average of 19.33 making it cheaper to purchase now than in the past. In both cases, 3M makes a strong case for continued research.
Payout Ratios
Dividend growth is important when picking the correct stock for purchase. Investors are able to judge future dividend growth by analyzing the earnings per share and free cash flow payout ratios. A company without enough earnings to support their dividend may slash the payout. The current dividend is 73.8% of MMM earnings the last 12 months. The payout percentage is the highest it has been over the past decade. The dividend to free cash flow payout ratio is slightly better at 61.9%. 3M needs solid earnings to continue an aggressive increase in their annual dividend amount.
Future Estimates
3M Company is an established company with a spotless record pertaining to rewarding their shareholders. The Argus analyst report predicts a small dividend increase from $5.88 this year to $6.00 in 2021. 3M pulled earnings guidance in 2020 due to the Covid-19 pandemic, but analyst estimate earnings of $8.91 per share. 3M does stand to have a solid 2020 due to its Health Care segment and after an excellent first quarter should hit estimates. Based on these approximations- the dividends to earnings per share payout would recede below the 70% threshold in 2021.
Fair Value
Calculating fair value has many different methods- and I combine two analyst reports, 5-year high yield, dividend discount model and 5-year average low P/E ratio as a guide to pricing a stock. The combination of these show a fair value price of $173.26 for 3M Company.
Final Thoughts
3M Company is an excellent company. The Post-it note has become an indispensable part of business and home life, along with scotch tape and scotch pads. The remainder of the company is positioned to benefit from an expected economic recovery in the second half of 2020. 3M is committed to their dividend and raised it for 6 decades. 3M Company has a P/E ratio at its lowest level since 2016 and at the highest yield percentage in a decade. Top line revenue and eps is not where I want to see them based on 2019 performance, but 3M is 100-year-old company surviving many business cycles. An investor who wants to add dividend royalty may be hard pressed to find a better opportunity to purchase