GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

3M Is An Excellent Long-Term Portfolio Stock

June 20, 2014 | About:
Faisal Humayun

Faisal Humayun

3 followers

3M Company (MMM) operates as a diversified technology company worldwide. The company has strong presence in the industrial, health care, consumer, safety & graphics and electronics & energy sector. This article discusses why the stock is a great company to own and should ideally be in an investor’s long-term portfolio.

Globally Diversified

In an era of economic uncertainty, 3M is well positioned with a excellent global diversification with 64% of the company’s FY2013 sales of $31 billion coming from outside the United States.

In particular, Asia and Greater China constitute 29.4% of the company’s total revenue. This is a big positive factor as 1.3 billion people in China and 1.2 billion people in India will have strong growth implications for 3M.

Among other emerging and developing markets, 3M also has strong presence in Latin America, Central East Europe and Middle East & Africa.

The global diversification will ensure that 3M continues to grow at a robust pace in the long-term. Further, the market in Asia is still under penetrated and the revenue contribution from Asia (including Greater China) will continue to increase.

Increasing Research And Development Investment

3M is all about product and technology innovation. At a revenue base of $31 billion, growth can only be achieved through new products and technology. As a part of its strategy (2013-17), 3M plans an EPS growth in the range of 9%-11% annually and a organic revenue growth in the range of 4%-6% annually.

This growth (organic) can only be achieved through greater focus on research and development, which adds to the company’s product pipeline or increases the value of an existing product.

Considering this, 3M has already boosted its research & development investments from 5.5% of sales in 2012 to 5.6% of sales in 2013. The company plans to increase the R&D investment to 6% of sales by 2017. Clearly, 3M is going all out on innovation and this should help the company achieve the desired growth.

Boosting Shareholder Return

3M plans to boost shareholder value creation and shareholder returns through higher dividends and a bigger stock repurchase plan.

From $2 per share in 2008, the company has increased the dividends to $2.54 per share in 2013. However, the company’s guidance for 2014 dividends is exceptional as 3M plans a 35% dividend increase in the current year to $3.42 per share. This might just signal the beginning of an era of robust dividend growth and it makes the company an excellent buy for dividend seekers.

3M has also been creating shareholder value through stock repurchase. From 2008-12, the company made stock repurchase worth $7.4 billion. However, the new plan for 2013-17 involves a stock repurchase in the tune of $17 billion to $22 billion. This is huge and makes up for nearly 20%-25% of the company’s market capitalization. Therefore, over the next 4 years, there will be significant shareholder value creation as the repurchases boost the EPS significantly.

Inorganic Growth Strategy

Besides pushing organic growth through extensive research & development, 3M also plans inorganic growth over the period 2013-17. The company intends to invest $5 billion to $10 billion over this period for strategic acquisitions.

I am of the opinion that a significant part of the acquisition might be in emerging markets for further consolidation of the company’s strong position. Further, the company is looking at high growth areas and technology from an acquisition perspective.

Besides the 4%-6% organic revenue growth planned, game changing acquisitions can result in double digit revenue growth for the company.

Conclusion

3M has some excellent strategies lined up for growth and shareholder value creation. With global diversification and strong focus on emerging markets, 3M is well positioned to grow at a strong pace over the next few years.

3M also has a very strong financial profile and this enables the company to reward shareholders through higher dividends and share repurchase. In addition, the financial flexibility will allow the company to make significantly large acquisitions in the foreseeable future. Considering these positives, 3M is an excellent stock for an investor’s long-term portfolio.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 0.0/5 (0 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK