There are some companies that are a part of your life and you don't even know it. They have so entrenched themselves in our daily life that when you grab one of its products, you don't even give it a second thought. These companies advertise their products to you all the time, but you aren't even aware that the product is part of a gigantic, global brand name that you know and recognize. These are the types of companies often make for excellent long-term core portfolio positions.
3M (MMM, Financial) is one such company. It's been around since 1902, if you can believe it and publicly traded since 1970. The stock returned 44 times its initial price during that period and pays a dividend of 2.4%. The company is still quite profitable, and it is not going away any time soon.
Now, just looking around my home, here's how deep into an average person's life 3M has drilled: CD-ROMs, Nexcare band aids, Scotch tape, Scotch tape dispenser, Scotch-Brite detergent (and pads), Oxy Carpet Cleaner, Post-It Notes, Scotchgard (on the couch), O-Cel-O Sponge cloth, Scotch Cassette Deck Head Cleaner, 3M cushioned mailers, 3M glue sticks, Scotch micro-fiber cleaning cloth... and that's only three rooms!
Many companies grow via acquisition. Not 3M. They just keep making things that people need. The company's quality is such that it has no trouble obtaining distribution outlets for products and the kinds of products it sells are so ubiquitous that there's tons of real estate to get their products into.
In today's global economy, whatever consumer staples Americans need, citizens of other countries need as well. 3M is truly a global empire, and with the exception of the desert, there's no reason it's reach cannot rival that of Coca-Cola's (KO, Financial). It doesn't even limit itself to consumer repeat purchase products. The company has a huge presence in industrial supplies, displays and graphics, health care, security, transportation and communications.
It's imperative that an investor understand just how diverse this product mix is, because that's the reason it should be considered a core holding. It's also the reason for 3M's continued strong financial results. The most recent quarter showed a +25% increase in revenue over last year, to $6.35 billion. 3M sells a lot of what it sells, but even company executives were shocked at the growth.
This led to a +75% increase in earnings over the same quarter from last year. With the most recent Consumer Confidence report showing the highest level since September of 2008, and first quarter's GDP growing at +3.2%, it suggests that 3M may be in the midst of a new sales surge.Analysts are projecting +16% earnings growth this year, and +11% annually during the next five years. Not bad for a company that's more than a century old. A company this reliable also tends to earn a PEGratio that's significantly higher than 1.0, yet the company's PEG sits at just 1.05. It's also useful to compare it to a similar company to see if it represents a relative value. 3M is sometimes considered a competitor to Johnson & Johnson (JNJ, Financial). This venerable entity is only projected to grow +7% during the next five years and has a current PEG of 1.84. Relatively speaking, 3M is the bargain.
Add to this the fact that 3M generated $4 billion in free cash flow last year, and it's a wonder that the dividend is only 2.4%. Nor is there a reason to pay down $5 billion in debt, when they can keep cycling that money into the company, inventing and innovating the next generation of products. This innovation should be highlighted, because it demonstrates a company that will not just rest on its laurels and fade into the sunset . The company routinely spends about 5% of revenue on R&D. The results are impressive. 3M just snagged two Gold Awards at the Edison Best New Products Award ceremony, one for mobile projection technology and the other for a stethoscope that improves the ability for physicians to hear and interpret heart sounds.
All in all, 3M truly fits the definition of what Peter Lynch called a "stalwart". It's here to stay, and is a great selection as a core holding in a diversified portfolio.
-- Frederick M. Steier
Contributor
StreetAuthority
Add to this the fact that 3M generated $4 billion in free cash flow last year, and it's a wonder that the dividend is only 2.4%. Nor is there a reason to pay down $5 billion in debt, when they can keep cycling that money into the company, inventing and innovating the next generation of products. This innovation should be highlighted, because it demonstrates a company that will not just rest on its laurels and fade into the sunset . The company routinely spends about 5% of revenue on R&D. The results are impressive. 3M just snagged two Gold Awards at the Edison Best New Products Award ceremony, one for mobile projection technology and the other for a stethoscope that improves the ability for physicians to hear and interpret heart sounds.
All in all, 3M truly fits the definition of what Peter Lynch called a "stalwart". It's here to stay, and is a great selection as a core holding in a diversified portfolio.
-- Frederick M. Steier
Contributor
StreetAuthority
Disclosure: Frederick Steier owns shares of MMM.
