3M Co. (MMM, Financial) was trading at $180 on Sept. 22, and the stock has subsequently corrected to current levels of $166.
The stock is still higher by 10% year to date, and I see the near-term correction as a good opportunity to accumulate for the medium to long term.
3M reported third-quarter results on Oct. 25. That was the key downside trigger for the stock. The company’s revenue was in line with analyst estimates, and the EPS beat analyst estimates by 1 cent. However, the stock declined when the company reduced EPS estimate to $8.15 to $8.2 (from $8.15 to $8.3).
At midrange of the guidance, 3M is trading at a forward price-earnings (P/E) of 20.3, and I see valuations as appealing for a stock delivering strong return for shareholders in the form of dividends and share repurchase. The revision in guidance is marginal, and I see any correction as a long-term accumulation opportunity.
Coming to the factors to be bullish on 3M, the stock is a quality dividend play, and that’s the first reason to be bullish. Just to put things into perspective, 3M pays a dividend of $4.44 per share and has a healthy dividend yield of 2.69%. Further, for the first nine months of the year, 3M reported operating cash flow of $4.5 billion and free cash flow of $3.5 billion. With healthy free cash flows, I see the following positives:
- Strong dividend payout will continue along with continued share repurchase. This will create shareholder value on a continued basis.
- Robust free cash flows give 3M strong financial muscles for inorganic growth and potential entry into new technology. Just as an example, 3M acquired Semifinder, a medical coding technology company. Such acquisitions will provide a platform for long-term growth.
- One of the key strengths for 3M is research and development. High investment in R&D differentiates 3M from its peers. With strong cash flows I expect investment in technology to continue. R&D as a percentage of sales was 5.5% in the third quarter, and this factor is likely to be a key revenue and EPS growth driver.
Coming back to third-quarter earnings, organic sales growth in Asia Pacific was negative 2.2% while organic sales growth in Latin America and Canada was positive 1.2%. While Asia Pacific growth disappointed in the quarter, I see Asia Pacific and Latin America as one of the company's key long-term growth drivers.
Be it the consumer, health care or industrial division, the potential to penetrate is significant in emerging markets, and 3M has the financial flexibility for growing in these markets. The slowdown in Asia has impacted results, but the long-term growth story remains intact and can potentially drive growth for 3M.
Just to put things into perspective, 3M reported strong growth in Asia Pacific in the consumer, health care and safety and graphics business. However, this was offset by double-digit declines in electronics and energy. Consumer-driven growth is still strong in Asia Pacific. Once the energy sector recovers and industrial activity improves in China and India, the growth trajectory from Asia Pacific will look meaningfully different.
3M is a quality dividend stock, and I expect robust dividends to continue in addition to growth in top line and bottom line that will be driven by innovation coupled with focus on Asia Pacific and Latin America. The recent correction is a good buying opportunity with a medium to long-term investment horizon.
Disclosure: No positions in the stock.
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