3M (MMM) has been a big value creator for investors in the last few years. The company has rewarded investors through capital appreciation, dividends and share repurchase. On March 2, 3M touched a YTD high of $170.5 and the stock is currently down by 6.7% to $159.0 per share. The recent decline in the stock has come after the company’s 1Q15 result announcement that had some near-term disappointment. In my view, this near-term bearish trend is a great opportunity for investors to consider long-term exposure to 3M. This article discusses the reasons to be bullish on the stock with an investment horizon of 3-5 years.
3M reported revenue of $7.6 billion in 1Q15, representing a decline of 3.2% compared to 1Q14. However, the company’s EPS was $1.85, representing an increase of 3.4% as compared to 1Q14. Therefore, the results were mixed, but a decline in revenue is indicative of the point that a slowdown in the euro area and China impacted the company’s overall growth. The important point from an investment perspective is that the global economy is again on a recovery path and a near-term sales slowdown is certainly not a matter of concern.
Before talking about some key operational developments, I want to focus on 3M's shareholder value creation initiatives. The first positive is that 3M has a high dividend payout of $4.1 per share and this translates into a dividend yield of 2.5%. With the company reporting a free cash flow of $790 million for 1Q15, I am of the view that 3M will continue to boost its dividend payout in the foreseeable future. In 1Q15, 3M paid $652 million in dividends, with the company increasing the dividends by 20%. The dividend increase is an indication of the strong growth trend is dividends, which is likely to sustain in the coming years. For 1Q15, 3M also repurchased $886 million worth of shares and this provides an additional boost to the EPS.
On the operational side, the points that I wanted to highlight is the $1 billion acquisition of Polypore’s Separations Media business. This acquisition will enhance the company’s existing filtration platform and help generate new growth opportunities. The point I want to make here is that 3M has inorganic growth as a part of its strategy and I expect more such acquisitions in the coming quarters to boost the company’s sales as well as technological edge.
Another point from an operational aspect is that the company’s operating income for 1Q15 was $1.7 billion with operating margins at 22.8%, representing an increase of 90 basis points as compared to 1Q14. This is indicative of operational efficiencies and I expect the company’s operating margin to remain robust. In other words, I expect EPS growth to be strong in the coming years even if revenue growth is relatively muted.
In conclusion, 3M will continue to grow through innovation and product excellence as it has done in the past. In addition, inorganic growth will play a bigger role in the coming years. Investors should therefore consider the stock with a long-term investment horizon, ignoring the near-term fluctuations. Strong dividends will continue and I expect meaningful capital appreciation in the coming years as the global economy stabilizes.
