The current geopolitical situation has made the stock market very volatile, but bargains have begun to appear. 3M Co. (MMM, Financial) is currently offering a compelling entry point for long-term investors. The dividend yield has recently breached 4%, while the stock is being offered at a solid margin of safety.
3M is a diversified manufacturing and technology company with operations in more than 70 countries. The company currently operates four business segments: Safety and Industrial (36.6%); Transportation and Electronics (27.4%); Health Care (25.9%); and Consumer (16.6%). Its strength is in material sciences with high levels of research and development as well as innovation.
The GF Value is an intrinsic value estimate from GuruFocus that uses the stock's historical price multiples, past returns and analysts' estimates of future performance. With a modestly undervalued rating, the GF Value Line shows there is a good margin of safety.
GuruFocus' discounted cash flow model confirms around a 20% margin of safety. Note that 3M has a high business predictability rating of four out of five stars.
The reverse DCF model shows the current price can be justified with a 2.72% earnings per share growth rate for 10 years. This is much lower than the growth rate of 4.7% 3M has achieved in the past 10 years. Instead of projecting future cash flows, the reverse DCF model takes the current share price and works backward to project how much cash flow (or earnings) would be required to generate its current stock price.
Morningstar analysts rate 3M as four stars with a fair value of $192 per share, while CFRA Research rates the company as a sell with a 12-month price target of $164. (Note the CFRA analysis was dated Feb. 1 and the stock has fallen substantially since then). Valueline offers an 18-month midpoint target of $185.
Dividend
3M is a great company for dividend growth investors.
The company's dividend safety appears to be solid as the payout ratio is in the 60% to 70% range and there is a large gap between earnings/free cash flow and the dividend payout. 3M has been increasing the dividend by over 6% per annum and it is unlikely this pace will falter in the near future. Therefore, the dividend offers a hedge against inflation for income investors.
Conclusion
It is not often a blue-chip company like 3M goes on sale. The company is a steady grower embedded into the gross domestic product of the Western World with a compelling divided yield. It also appears to be bouncing back from a oversold position, as per the chart below with a current relative strength index of 34.5.
Overall, now may be an opportune time to look into the stock from both a fundamental and technical perspective.
