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Four Reasons Why 3M Looks Like a Solid Long-Term Investment

June 19, 2014 | About:
kcpl

kcpl

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3M (MMM) is an investor favorite on account of a solid dividend given by the company, along with the buyback of shares. The company has turned in a stable performance this year. Although, it had a slow start, yet from a long term perspective, it seems to be strategically well-positioned. This stock seems to be right for conservative investors, who want to benefit in the long run.

Solid results

3M reported solid growth in its earnings, generating sufficient cash flows that will enable it to sustain a strong dividend yield of 2.60% along with the buyback of shares. Its earnings for the fourth quarter increased 14.9% on a year over year basis and it reported an operating income of $1.6 billion.

3M had a net income of $1.1 billion and converted 131% of its net income to free cash flow. Moreover, it has added value to its share holders by paying a dividend of $243 million, along with the buy back of shares worth $1.7 billion during the quarter. Going forward, 3M expects its earnings to be in the range of $7.30 to $7.55 per share. This earnings guidance would further benefit the shareholders as the company will return more cash as free cash flow conversion is expected to be in the range of 90% to 100%.

Long-term moves

Not only this, but from a long term perspective, the company plans to repurchase shares worth $17 billion to $22 billion by 2017. This is a reflection of the strength of its business and management has chalked out sound strategies for the days ahead.

In fact, one of the strategic moves that the company adopted was to combine its business in electronics and energy that will serve its customers better. Also, it will help the company to gain rapid cost synergies, and strengthen underperforming businesses. Similar strategies were adopted by 3M in the safety and graphics segment to enhance its product offerings and improve its relevance to customers.

The company has also increased its investment in long-term disruptive technologies, aimed at those opportunities, which have significant growth potential. 3M has made significant progress in the implementation of its global enterprise resource planning ERP. This has been launched in various countries that will help the company achieve better synergies, cost reduction, and better management.

Cost control

On the cost side, 3M has plans to reduce its total cost of capital, which will ultimately benefit the shareholders with higher returns. With a focus on organic growth, the company has invested in CapEx and research and development. In addition, as a part of its strategic moves, the company has plans to invest $5 billion to $10 billion in acquisitions by 2017.

Growth prospects

Its automotive OEM business has also been performing very well. Last year, it reported an organic growth of 7%, which was more than twice the rate of global auto production. Moreover, its technological ability to solve problems for its important OEM customers has also helped to boost its numbers. 3M is focusing on emerging markets such as China, Mexico, and Indonesia by offering them solutions according to their requirement.

We have already seen that 3M is making various strategic moves in its graphic and safety business. Consequently, its margins have increased on account of greater scale and reduced costs. Its recent acquisition is also one of the key factors for its good business in this segment.

Similarly, its industrial business is also performing well as it was up 6% last quarter, and management expects this same trend to continue in the future as the company is spending more on industrial acquisitions. 3M’s healthcare business was driven by growth in health information systems, food safety, and critical and chronic care, 3M could see more organic growth in the future from this segment.

Conclusion

Currently, 3M has a trailing P/E of 19.81, but its forward P/E looks more attractive at 16.21, which is an indication of the growth in its earnings. The company is continuing with its share buyback program and is focused more on reducing its capital expenditure. In addition, management has high expectations regarding its earnings growth for the next five years. Thus, it seems that 3M will continue with its solid performance and investors should consider adding this stock to their portfolio.


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