There is no doubt that 3M (MMM, Financial) has been a value creator with the stock consistently rewarding shareholders through dividends, share repurchase and capital appreciation. In the past, I have been positive on 3M with a view that the stock is a quality stock for the dividend portfolio.
This year, however, has however been challenging for 3M and the stock has declined by 9.9% year-to-date. On Dec. 15, 3M announced its outlook for 2016 and updated earnings guidance for this year.Ă‚
3M expects EPS of approximately $7.55 as compared to the prior guidance of $7.6 to $7.65. Further, the company expects organic growth of 1% versus 1.5% to 2% previously guided.
The guidance revision is not very significant, but the main concern is the factor that has driven guidance revision. The global economy seems to be on a renewed downturn and earnings will be impacted even if the company’s innovation continues to drive product expansion. In this context, the Fed meeting outcome is important and I expect continued support from central bankers globally (amidst economic weakness). However, if the global economy continues to remain sluggish, 3M can potentially witness further earnings revision going into 2016.
For 2016, 3M currently expects earnings growth in the range of 7% to 12%. If the mid-range of the guidance is considered, an earnings growth of 9.5% is likely. This would imply FY16 EPS of $8.27 and at current stock price of $148, 3M is trading at FY16 PE of 17.9. For a company that is paying $4.1 in annualized dividends, I don’t see the valuations as expensive. Therefore, if 3M is able to grow earnings at 9% to 10%, I don’t see the stock sliding significantly from current levels. As mentioned above, my primary concern is potential earnings revision in 2016 as well as sluggish global economic growth.
Another point that is worth mentioning here is that 3M expects operating cash flow of $8.5 billion to $9 billion for 2016. With the company’s dividend expected to grow in line with earnings, I expect 2016 dividend to be higher than 2015, and I also expect the company to pursue inorganic growth (as it has done in the recent past). Therefore, from a financial perspective, I don’t see any headwinds. The only headwind comes from the economic perspective and can potentially impact stock sentiments. I would still consider exposure to 3M at these levels because even if the stock remains sideways, investors will see dividend inflow in the range of $4.1 to $4.3 per share.
From a long-term perspective, I see this as an opportunity to gradually accumulate 3M. The company’s innovation is the single largest factor that makes me positive on the stock. For 2016, 3M expects to invest $1.8 billion towards R&D and this comes to 5.8% of expected sales. Considering the potential that emerging Asia holds, 3M will have a big advantage due to its innovative products as compared to peers. In the near-term, I expect the company’s developing market sales to be sluggish, but developing markets will be the key growth drive for the company from a three to five-year perspective.
In terms of risk, I feel that currency headwinds can impact the company’s EPS besides the economic headwinds. In the current economic environment and geo-political scenario, I expect increasing currency volatility.
In conclusion, investors can consider gradual exposure to 3M and this is a stock that can be accumulated on every decline. Below $150 per share, the stock looks good for long-term investment.
Disclosure: No positions in the stock.
