3M - MMM

Today I’d like to take a look at this member of the “Broad Dividend Achievers”.

“3M Company is a diversified technology company with leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation and other businesses. They are an integrated enterprise characterized by substantial intercompany cooperation in research, manufacturing and marketing of products.”

They trade under the symbol MMM on the New York Stock Exchange and are included in the following indexes Dow Jones Composite, Dow Jones Industrial, S&P 100, S&P 500 and S&P 1500 Super Comp.

-Current P/E – 14.5X
-2008 Estimated PE – 14.7X
-2009 Estimated PE – 13.3X
-ROE – 37.74%
-Current Yield – 2.36%
-5 Year Average Yield – 2%
-Current Payout Ratio – 33.5%
-5 Year Historical Payout Ratio – 39%
-3 year dividend growth rate – 10.02%
-5 year dividend growth rate – 10%

Other Facts:
-Dividend History: Paid quarterly since 1916
-60% of their revenues now come from outside the US
-Increased the quarterly every year for the last 50 years.
-Have a long history of innovation
-S&P Rating: 3 stars, Hold, $85 target price (5.4% upside)
-Argus Rating: Buy, $105 target price (30% upside)

Calculated Fair Value:
The fair price I calculated for this stock is $85.62. This is virtually identical to the target calculated by the analysts at S&P. This represents a 5.2% discount to the current price of $79.52.

(Disclaimer: I have a position in MMM but am not a financial advisor. Please do your own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)

3M – Increases Dividend

On Feb 11th, 3M announced a 4.2% increase in their quarterly dividend, making 2008 the 50th consecutive year that the company has increased their dividend. Although, the dividend increase is only marginally above the rate of inflation their payout ratio has slowly been coming down. The 5 year average payout ratio is approximately 39% while their current payout ratio is about 33.5%. The Moneygardener has suggested on his blog that perhaps the paltry dividend increases are a result of 3M bulking up for future acquisitions and I certainly agree that’s a probable option. However, another reason for the small dividend increase could simply be that management is taking a cautious approach. I’m speculating that the management at 3M is like most of the large and small players in the market, just waiting to see what happens to U.S economy. Will there be a recession? If so how bad will it be? Although, 60% of 3M’s revenue now comes from outside the U.S they are still very closely tied to the U.S economy and are often used as a barometer for the overall health of the U.S economy.

As an investor in 3M I like to see management taking a cautious approach. Personally, I would rather a small dividend increase in uncertain markets than a large dividend increase that could become unsustainable if global markets start to erode.

(Disclaimer: I currently own shares of MMM. However, I am not a financial advisor. Please do your own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)

MMM Update

It looks like I might have bought this one just in the nick of time. They just increased their dividend 4.3% (not a huge increase but bigger than inflation). Additionally, "3M authorized a $7 billion 2-yr stock buyback plan. Soleil Securities upped MMM to Buy from Hold with an $86 tgt. Deutsche Bank upped 3M to $90 from $87."

Well that's my good news for the day.

US Dollar - MMM & GE

Some concerns have been raised about buying MMM or GE because of the potential of a rollover in the US economy and a depreciation of the dollar. Although I’m also a little concerned about the US economy and the dollar I am comfortable holding MMM in a downturn because 60% of their revenues now come from outside the US. In my opinion this acts as a natural hedge against a depreciation in the US dollar ie- US dollar goes down, but because they report in US dollars 60% of their revenues have to be converted back into US dollars which would inflate their earning, which will hopefully offset all (or some) of the losses you would incur from a depreciating US dollar.

MMM vs GE

For those of you that are toying between MMM and GE here is a breakdown of the two companies. (I originally posted this on a forum at www.moneysense.com)

MMM

PE: 14.5
ROA: 18.65
ROE: 37.82
Dividend Yield: 2.5
Price/Sales: 2.37
Price/Book: 5.44
2007 projected P/E: 15.7
2008 projected P/E: 14.2

-Dividend History: Paid quarterly since 1916
-60% of their revenues now come from outside the US
-Have a long history of innovation
-S&P Rating: 3 stars, Hold, $83 target price (12% upside)
-Argus Rating: Buy, $89 target price (20% upside)


GE

PE: 18.22
ROA: 3.02
ROE:18.65
Dividend Yield: 3.09
Price/Sales: 2.29
Price/Book: 3.33
2007 projected P/E: 16.33
2008 projected P/E: 14.6

-Dividend History: Paid quarterly for over 100 years
-significant % of their revenues now come from outside the US (couldn’t find the exact number)
- S&P Rating: 5 stars, Strong Buy, $45 target price (23.5% upside)
-Argus Rating: Buy, $42 target price (15% upsside)

I’d just like to note that I like the fact that GE has clearly defined goals (8% organic growth) and is definitely moving in the right direction with their “ecomagination” concept. I don’t think it will be long until green technologies will start to really sell, and GE is taking an aggressive stance on their green (and profitable) technologies. I really like GE and plan on buying them in the future. I chose to buy 3M strictly on a valuation (and ROA, ROE) basis but I would take a serious look at GE if it pulled back another 10% or so. I would be more comfortable buying them when their forward P/E is in the 14X range. I just don’t feel that 8% organic growth deserves an 18X multiple (especially with a company as huge as GE).

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)

MMM

I took a position in MMM yesterday at $74 a share and here is why.

- They got hammered this week (on an earnings miss).
- Have a history of innovation.
- Have a historically low multiple 15X last years earnings.
- 60% of their revenues are now outside of North America.
- Projected earnings growth of 10% annually.
- 2.5% dividend yield that increases yearly (paid since 1916).
- Diversified product offerings.

The only real negatives I can see in this name are the possible slowdown of the US economy.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)