Today I continue my series on the DOW 30 component stocks. I will be examining 3M (MMM). 3M is an exceptional dividend grower with an average yield. Its priced for investment, but its balance sheet has some weakness. To see how I came to those conclusions read on.
3M (MMM)
Price: $84.40
Shares: 693.87 million
Market capitalization: $58.56 billion
What does the company do: Based in St. Paul, Minn., 3M manufactures a diversified array of industrial products. Known especially for popular consumer products such as Scotch Tape and Post-It Notes, the company's portfolio also offers liquid crystal display films, health-care technology, heavy-duty adhesives, and more than 40 other technology platforms. 3M is an S&P 500 component and a part of the Dow Jones Industrial Average.
Morningstar’s take: Over its long history, 3M has invented some of the world's greatest products. We think the firm's innovative culture, bottom-line focus, and low-cost manufacturing have carved a wide moat around its business that will enable the company to reap outsized rewards over the long run. That said, the company tends to feel the pinch of economic slowdowns relatively early, and near-term headwinds could crimp the firm's results for several quarters.
Bonds: $5.8 billion outstanding
Times interest earned: 3M’s earned 23 times its bond interest expenses in 2011. They earned $4.283 billion and paid $186 million in interest expenses in 2011. Their bonds are not a threat to the dividend at the present time. Although, it looks like they have some big bonds due in the 2013-2017 timeframe.
Preferred stock: none.
DIVIDEND RECORD: I don’t see any cuts going back to 1987 which is as far as I can see on Google Finance. They have grown their quarterly dividend from $0.12 in 1987 to $0.59 today. That is a straight line gain of 391% over 25 years or 15.6% straight line annual dividend growth.
Dividend: $0.59 quarterly
Dividend yield: 2.8% ($2.36 annual dividend / $84.40 share price)
Dividend payout: 39% using 2011 EPS of $6.06 –OR- 44% using average adjusted earning power of $5.39
EARNING POWER: $5.39 @ 693.87 million shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $4.12 | $3,199 M | 777 M | $4.61 |
2006 | $5.06 | $3,851 M | 761 M | $5.55 |
2007 | $5.60 | $4,096 M | 732 M | $5.90 |
2008 | $4.89 | $3,460 M | 707 M | $4.99 |
2009 | $4.52 | $3,193 M | 707 M | $4.60 |
2010 | $5.63 | $4,085 M | 726 M | $5.89 |
2011 | $5.96 | $4,283 M | 719 M | $6.17 |
Seven year average adjusted earnings per share is $5.39
Consider contrarian buying below $43.12 (8 times average adjusted EPS)
Consider value buying below $64.68 (12 times average adjusted EPS)
3M (MMM) is currently trading at 15.7 times average adjusted EPS. This is stock is priced for investment.
Consider speculative selling above $107.80 (20 times average adjusted EPS)
BALANCE SHEET – Horrible price to book value ratios. Quick ratio (Cash/Current Liabilities) looks weak.
Book value per share: $23.32 ($16.182 B equity / 693.87 million shares)
Price to book value ratio: 3.61 (under 1.0 is good) 3M investors are paying $3.61 for each $1.00 in book value. That is a huge premium to pay.
Tangible book value per share: $10.42 (equity - $7.090 B goodwill - $1.865 B intangibles / 693.87 million shares)
Price to tangible book value: 8.10 (near 1.0 is good) Wow! Investors are paying $8.10 for each $1.00 in tangible assets. The is a substantial premium.
Current ratio: 2.37 latest quarter (over 2.0 is good) ($12.853 B current assets / $5.408 B current liabilities)
Quick ratio: 0.69 latest quarter (over 1.0 is good) 3M has huge amounts of receivables and inventory.
Debt to equity ratio: 0.28 (lower is better)
Percentage of total assets in plant, property, and equipment: 24.2% (the higher the better) Other assets percentages of the total assets are: current assets 40.15%, intangibles 27.97%, and other long term assets 7.66%
Working capital trend: Nicely upward
CONCLUSION – The best time to buy 3M in recent years was in early March 2009 when the price dropped to $41.83. That was below contrarian pricing of $43.12. Their dividend growth has been phenomenal over the past 25 years. However, the dividend yield is just average for a DOW 30 stock. 3M is currently priced for investment at 15.7 times, but that seems quite expensive when you consider where the stock price has been. 3M’s net income has been incredibly stable even at the height of the financial panic of 2008-2009. 3M’s balance sheet is very weak mostly due to extremely high price to book value ratios. I would put 3M on your watchlist with an alert set for below $64.68 per share.
DISCLOSURE – I don’t own 3M (MMM).
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