I just bought 100 shares of 3M at a price of $160.39. That’s a solid $16,039 investment. And I don’t make investment decisions like this willy-nilly.
3M won’t be a home run investment. I’m not going to double or triple my money on the position anytime soon. But playing the long-game, that’s easily doable. It’s a cashflow machine!
For an income investor, 3M is as reliable as it comes. The company has paid dividends without interruption for more than 100 years. Not only that, but it’s also increased the annual dividend for 63 years in a row.
3M has survived and thrived through a pandemic, the great recession, the dot com bubble, a world war and many other downturns. This is a powerful trend and I don’t expect it to change. As you’ll soon see, the company keeps chugging along and rewarding investors along the way.
To start, we’ll dig into the biggest risks with investing in the company. It’s not as exciting… but risk management is what sets apart novice and experienced investors. Or, feel free to skip ahead to the good stuff.
3M Stock Risks to Consider
With any investment, I always ask… why should I not invest in 3M stock?
Investors are already factoring in some risks and have pushed down 3M’s share price…
It’s down roughly 40% from its all-time high back at the start of 2018. And it’s down more than 20% from its peak last year.
One big risk that often comes up in conversation is market timing. The downtrend could easily continue and there might be a better buying opportunity. Although, this is always a risk and trying to time the market in the short-term is a fool’s game. The world’s best investors can’t do it consistently. As the saying goes…
Time in the market is more important than timing the market.
Overall, the stock market is overvalued based on many metrics. That’s based on historical averages. It’s hard to find good deals today… and another recession might be on the horizon. Although, this mindset keeps investors on the sidelines for far too long.
Instead, it’s better to focus on individual investments. And 3M is trading at an attractive valuation based on its price, relative to underlying value.
I planned on covering more risks in detail but 3M really doesn’t have any huge, out of the normal issues. It’s a fairly standard set of concerns with litigation getting some of the most attention…
- Regulation and Litigation
- Supply chain
- Inflation
- Competition
- Low Growth
Really, it’s nothing new and 3M continues to create value for its customers, investors and other stakeholders…
3M’s Business and Revenue Growth
Looking at the top line, here’s 3M’s revenue over the past decade…
Revenue bounces around slightly but is trending in the right direction.
To accomplish this fairly stable growth, 3M has built out an impressive portfolio of products. It produces over 60,000 products. The company hasn’t yet released its full year 2021 report. So, here’s a look at 2020 revenue by segment…
Safety and Industrial is the largest segment followed by Transportation and Electronics. Then comes Health Care, followed by the Consumer segment. The company is diversified on a product level and also globally…
Almost 50% of total revenue comes outside the Americas. 3M has impressive reach and economies of scale with solid pricing power.
As you move further down on the financial statements, income numbers have been moving higher as well. There’s been more year-to-year volatility but that’s to be expected with countless GAAP, IFRS and other accounting rules.
With profits and cashflows moving higher over time, 3M is able to continue rewarding investors with bigger dividends…
3M Dividend History and Trends
Over the past 10 years, the dividend per share has more than doubled. It’s up close to 170% and over 10% on a cumulative annual growth basis. That far outpaces average inflation. It’s even higher than the recent spike which might not sustain.
The dividend growth has slowed recently but this has happened plenty of times throughout its long payout history. And either way, buying 3M shares at a price of $160.39, I’ve locked in close to a 3.7% dividend yield on cost. Relative to other investment opportunities today and the dividend safety, that’s hard to beat…
Over the past 10 years, total outstanding shares have dropped from 719 million to 586 million today. That’s more than an 18% decrease and when looking at the most recent quarterly filing on the SEC, roughly $6.5 billion remains available under the past buyback authorization.
In my mind, a repurchase program is another layer of safety for dividends. If tough financial times come along, it would likely be cut first.
Overall, 3M’s management has a pretty solid track record when it comes to capital allocation. Now, let’s take a quick look at 3M’s stock price relative to its value. In the words of Warren Buffett…
Whether socks or stocks, I like buying quality merchandise when it is marked down.
When it comes to socks, it’s pretty easy to determine their value. But with multi-national corporations, on the other hand, it’s not so easy to determine what they’re worth. That’s why we see a lot of short-term volatility in the stock market. Nonetheless, there are some simple metrics we can use to get an idea of 3M’s current valuation…
3M Stock Valuation
When it comes to valuing a stock relative to underlying value, there are many ways to slice the cake. I used to rely heavily on discounted cash flow modeling. Although, more complexity doesn’t often lead to better outcomes. Instead, it has a tendency to raise confidence without leading to better outcomes.
So, let’s just look at two of the most popular value indicators over time. And to start, here’s the all-popular PE ratio…
This is just a year-by-year and it shows roughly 10 years. Coming in at a lower-than-average level today, the current PE ratio shows a much better value opportunity. That’s assuming 3M continues its stable long-term earnings growth. And if we looked back even further, the PE ratio goes lower but nonetheless, still one of the better opportunities today.
For the second indicator of value, let’s look at the dividend yield over time…
I’ve pulled data going back even further. Coming in at close to 3.7% today, 3M’s dividend yield is on the higher end when looking back at well over a decade. It only spiked higher around the start of the pandemic and during the housing crisis.
From a yield perspective, 3M is looking solid today!
Overall, 3M stock still isn’t the cheapest it’s ever been. But from a financial standpoint, it’s one of the best income opportunities today for long-term investors.
I hope you’ve enjoyed my research and please let me know if you have any questions down below. If you want to see two of my favorite non-dividend tech stocks, check out that video as well.
Invest mindfully,
Brian Kehm