R&D Remains the "Heartbeat" of 3M

09/18/2018 5:00 am EST


Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Founded in 1902, Minnesota Mining and Manufacturing (MMM) started as five businessmen set out to mine a mineral deposit for grinding-wheel abrasives; over the past century of innovation, the firm has invented everything from masking tape to Post-it Notes, explains value-expert Ingrid Hendershot, money manager and editor of Hendershot Investment.

While 3M is 116 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 $1.9 billion or 6% of sales in 2017 on research and development to drive organic growth and new products.

Top priorities for growth today include automotive electrification, advanced wound care, connected safety, data centers, structural adhesives, filtration, air quality and population health.

3M’s diversified product portfolio and productivity has resulted in profitable operations with return on invested capital topping 20% for five consecutive years.

The firm converts 100% of earnings to cash, which is a high-quality company hallmark. Free cash flow for 2018 is expected in the $4.9 billion to $5.7 billion range. 3M has a strong history of returning cash to shareholders.

3M paid its first dividend in 1916 and has paid dividends without  interruption for more than 100 years as the business grew and prospered over the decades.

The dividend was boosted by 16% to $5.44 per share in 2018, marking the 60th consecutive dividend increase. The sticky dividend currently yields an attractive 2.7%. In addition, the company expects to repurchase $4 billion to $5 billion of its shares in 2018.

3M posted strong second quarter results with record sales, broad-based organic growth, a double-digit increase in EPS and rising margins. Total second quarter sales increased 7% to $8.4 billion, an all-time high, with earnings up 17% to $1.9 billion and EPS up 19% to $3.07 on fewer shares outstanding.

Long-term investors may find this high quality and innovative company with robust cash flows and profitable operations to look "mmm…mmm" good at current valuation levels. Buy.

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