3M: A Century of Dividends

04/14/2017 2:50 am EST

Focus: INDUSTRIALS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

3M (MMM) offers unparalleled free cash flow generation and a very reliable 2.5% yield for investors seeking safe income, asserts Chloe Lutts Jensen, income specialist and editor of Cabot Dividend Investor.

I’ve always associated 3M with Post-it Notes, but consumer products account for only 15% of 3M’s sales. The rest comes from the industrial, healthcare and multi-industry sales of safety equipment and electronics.

In short, 3M products are everywhere, from welding masks, to kitchen sponges, to electronic stethoscopes, to the coating sprayed on road signs to make them more reflective.

This diversity of applications and customers lends stability to 3M’s revenues. In addition, consumables make up almost 50% of sales, which means lots of repeat purchases, improving the predictability of revenues.

3M has improved operating margins by several percentage points in recent years by combining divisions, making strategic acquisitions and divestitures, and implementing lean business practices.

In 2017, management plans to continue to grow earnings faster than revenue by deploying a new enterprise resource planning system worldwide and continuing to improve utilization and productivity.

Analysts’ consensus estimate of 5.6% EPS growth this year is near the low end of that range, while estimates for 2018 show an uptick to 8.8% growth year-over-year.

Over the next five years, analysts expect earnings to rise about 9% per year, a moderate acceleration from the 7% pace of the last five years.

Of course, changes in exchange rates and commodity prices can affect results unpredictably. However, 3M’s management has a proven track record of delivering free cash flow and earnings growth regardless of global economic conditions.

3M’s reliable cash flow has enabled the company to pay dividends consistently for 100 years, with increases every year since 1959.

Over the past three decades, the annual increases have averaged a solid 8% per year, while the last five annual dividend increases have averaged 15%. Going forward, management expects to grow the dividend in line with earnings.

3M has been in a long-term uptrend since the recession ended in 2009. At this point, 3M isn’t undervalued — the stock trades at 24 times current earnings and 22 times forward earnings.

But that’s the premium you pay for a high-quality blue chip stock with a 100-year dividend history that has beat earnings estimates in each of the last four quarters.

Investors looking to add a high-quality stock and reliable income stream to their portfolio can buy here or try to establish a position on a pullback of a couple of points. The company’s next earnings announcement is on April 25.

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