As the world emerges from the two-year shadow of the COVID-19 pandemic, Mr. Market has turned pessimistic, asserts Ingrid Hendershot, a leading value-focused money manager and editor of Hendershot Investments.
In 2022, the stock market has pulled back from record heights due to serious inflation and geopolitical concerns with Russia’s invasion of Ukraine.
At the same time, our high quality companies continue to generate strong cash flows which enable them to reward us with growing dividends, substantial share repurchase programs and acquisitions to drive future long-term growth.
Most of our companies have provided steady dividend increases over the decades despite numerous wars, conflicts, inflationary periods, panics, recessions and the recent global pandemic. This includes 3M (MMM) which has paid dividends for more than 100 years without interruption.
Over the past century of innovation, 3M invented everything from masking tape to Post-it Notes. During the pandemic, 3M was a crucial supplier of respirators.
While 3M is 120 years old, the company continues to churn out new products like a young startup. Research and development remains the heartbeat of 3M with the company spending $2 billion, or 6% of sales, in 2021 on research and development to drive organic growth and new products.
The strength and stability of 3M’s business model and strong free cash flow capability enables the company to invest through business cycles. Investing in 3M’s business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. To maximize value for shareholders, 3M expects to continue returning cash to shareholders through dividends and share repurchases.
In 2021, 3M reported a 10% increase in sales to $35.4 billion with net income and EPS each increasing 8% to $5.9 billion and $10.12, respectively. 3M was able to partially offset inflation pressure during the year with pricing actions.
During 2021, 3M generated a superb 39% return on shareholders’ equity and a healthy 19.5% return on invested capital. 3M produced robust free cash flow of $5.9 billion in 2021. This strong free cash flow enabled the company to reduce net debt by $1.2 billion, pay $3.4 billion in dividends and repurchase $2.2 billion of its own shares during 2021.
The 3M Board of Directors recently increased its quarterly dividend 1% to $1.49 per share for the first quarter of 2022, marking the 64th consecutive year of dividend increases. The dividend currently yields a very attractive 4%. 3M has paid dividends to its shareholders without interruption for more than 100 years, an enviable track record.
The company has returned over $14 billion to shareholders through dividends and share repurchases over the last three years. Returning value to shareholders remains a priority for the company as it moves forward.
In 2022, 3M is expecting total sales growth of 1% to 4%, which includes organic sales growth of 2% to 5%, EPS of $10.15 to $10.65 and robust cash flow. Included in this guidance is an anticipated decline in COVID-19 related disposable respirator demand in 2022, resulting in a headwind to organic growth of 2% and EPS of $.45.
The company also expects to generate $7.3 billion to $7.9 billion in operating cash flow in 2022, contributing to 90% to 100% free cash flow conversion.
In 2022, 3M plans to invest about $4 billion in research and development and capital expenditures. Long-term investors may find this high quality and innovative company with robust cash flows, steady dividend growth and profitable operations to look "Mmm-Mmm" good at current valuation levels.
