Innovation...and Dividends, Too

06/08/2010 12:00 pm EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says 3M appears to be turning around after a weak 2009, and its earnings are starting to take off, too.

3M (NYSE: MMM) is a large diversified conglomerate. In 2009, 36.8% of sales were produced in the US; 26.5% in Asia Pacific; 25.8% in Europe, Middle Eas, and Africa, and 10.9% in Latin America and Canada.

The industrial and transportation (IT) segment is the company’s largest, generating 30.8% of 2009 net sales. Products include tapes, abrasives, adhesives, filtration systems, energy control products, closures, and a variety of specialty materials.

The health care segment produced 18.6% of sales. It supplies tapes, dressings, wound closure products, casting materials, electrodes, stethoscopes, drapes, and masks. Dental products include restoratives, adhesives, polishes, crowns, sealants, and whiteners.

The consumer and office segment accounted for 15% of sales. It consists of nationally branded products such as Scotch adhesive tapes, Post-it low-tack adhesive stationary; Scotch-Brite sponges and scrubbing pads; Scotchgard fabric protectors; Nexcare bandages; ACE wraps, and Filtrete air conditioner filters.

The safety, security, and protection services segment was responsible for 13.8% of sales. Products include respirators, surveillance equipment, radio frequency identification equipment, insulation, weatherproofing materials, cleaning products, mats, and granules for asphalt shingles.

The display and graphics segment produced 13.5% of sales. It includes optical films for computer monitors, televisions, and hand-held electronics. It also makes reflective sheets for highway signs, license plates, and trucks, as well as commercial graphics products such as films and inks. Other products include overhead projectors and transparency films.

The electro and communications segment generated 9.8% of sales. It makes products designed for the electronics and communications industries. These include interconnect systems, high-performance fluids, high-temperature tapes, and touch screens and touch monitors.

Net sales in 2009 fell 8.5% to $23.1 billion. Since management slashed annualized costs by about $400 million, the operating profit margin improved 20 basis points to 20.8%. Nonetheless, net income fell 7.7% to $3.2 billion, or $4.52 per share.

Sales declines appear to have ended. Revenues were up 11.1% year over year in [the fourth quarter of 2009] and surged 24.7% year over year in [the first quarter of] 2010 to $6.3 billion.

All regions delivered double-digit gains in [the first quarter,] led by Asia-Pacific, which soared 54.1%. All segments also recorded double-digit gains. The operating profit margin expanded 698 basis points to 22.76% thanks to strong leverage on a leaner cost structure. Pro forma net income jumped 66.1% to $1.445 billion, or $1.40 per share. Including an $84-million one-time charge related to a Medicare Part D tax change, GAAP net income was $930 million or $1.29 per share.

Restructuring activities should reduce costs by another $150 million in 2010. Management recently raised full-year guidance once again based on robust organic sales growth, significant market share gains, and strong acceptance of new products. It also increased the quarterly cash dividend, something it has done for 52 consecutive years. (The stock closed at $58 Monday, and it yielded 3.7%—Editor.)

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