Company Description: 3M Co. provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
MMM is trading at a premium to all four valuations above. Since MMM's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 25.2% discount to its calculated fair value of $317.01. MMM earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
MMM earned one Star in this section for 3.) above. MMM earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 60 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
MMM earned a Star in this section for its NPV MMA Diff. of $1,633. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MMM has. If MMM grows its dividend at 11.2% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.64%. MMM earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Peers: The company's peer group includes: General Electric Co. (GE) with a 3.3% yield, Raven Industries Inc. (RAVN) with a 1.5% yield and Carlisle Companies Inc. (CSL) with a 1.4% yield.
Conclusion: MMM earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MMM as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $380.11 before MMM's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 60 years of consecutive dividend increases. At that price the stock would yield 1.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.8%. This dividend growth rate is lower than the 11.2% used in this analysis, thus providing a margin of safety. MMM has a risk rating of 1.75 which classifies it as a Medium risk stock.
MMM is the leader in many of the markets its serves with a culture that thrives on innovation. Its bottom-line focus and low-cost manufacturing have built a wide moat around its core businesses. The company has enjoyed strong historical earnings, dividend growth and free cash flow, with only modest capital investment. The company's debt to total capital of 52% (up from previous 51%) is slightly above my desired maximum of 45%. It has demonstrated the ability to generate strong returns on capital.
The company has consistently returned significant cash to its shareholders through share repurchase and dividends. Its Free Cash Flow Payout of 69% (up from 58%) is above my maximum of 60%, and its Debt to Total Capital of 55% is above my maximum of 45%. MMM is a great company with an excellent future. The stock is currently trading below my calculated fair value of $317.01. I will continue to look for opportunities to add to my position, as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in MMM (1.2% of my Dividend Growth Portfolio). See a list of all Dividend Growth Portfolio holdings here.
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Tags: MMM, GE, RAVN, CSL,
