Utilizing a buy and hold strategy works.
You don’t have to worry about commission and taxes eating into your returns and you are not fretting over the daily quibbles of the financial markets as a whole. It also makes it easier when you buy companies that harbor a well-known brand and sell a highly wanted and/or needed product. Technological conglomerate 3M (MMM, Financial) serves as a good example of one of these companies.
Post it notes, healthcare, filters, and more
3M operates under the following segments: industrial, safety and graphic, electronics and energy, health care and the highly visible consumer segment. Some of the more well-known consumer products include its Post-it notes, Scotch Glue Sticks, and Filtrete Filters for furnaces and air conditioners. It also sells surgical drapes, medical tapes, stethoscopes, industrial filters, and products that go into televisions. It’s safe to say that this company makes products that are highly wanted and needed.
Decent growth for a large company
The company expanded its fundamentals at a decent pace and is in good financial shape. According to Y Charts, over the past five years 3M grew its revenue, net income and free cash flow 31%, 37%, and 14% respectively which is acceptable considering the size of the company.
Rock solid balance sheet
The company sits on an excellent balance sheet. Its $3.5 billion in cash and investments equates to 26% of stockholder’s equity. I like to see companies possess cash and investments equating to 20% or more of stockholder’s equity to get them through tough times.
3M also holds a reasonable amount of long-term debt. Long-term debt creates interest which chokes out profitability and cash flow. I like to see long-term debt at 50% of stockholder’s equity or lower. In 2014, 3M’s long-term debt amounted to 51% of stockholder’s equity barely exceeding my threshold. 3M’s operating income exceeded interest expense by 50 times in 2014. The current rule of thumb for safety lies at five times or more.
The best way to gauge a company’s dividend sustainability is to compare how much of a dividend it pays relative to free cash flow in a full year. I like to see a company pay out less than 50% of its free cash flow in dividends so that it can retain the remainder for other uses. Last year, 3M paid out 42% of its free cash flow in dividends meaning that it exercises prudence in its dividend policy. Currently, the company pays its shareholders $4.10 per share per year and yields 2.5% annually. 3M is a dividend aristocrat that has increased its dividend for 56 consecutive years.
3M’s solid fundamentals and dividend history have resulted in superior total returns for the long-term shareholder. Over the past five years, 3M’s total return equated to 128% vs. 96% for the total return for the S&P 500, according to Y Charts.
3M’s products go into the important functions of society such as healthcare, industry and the office. This has translated into rock solid fundamentals. This company isn’t going anywhere anytime soon. Moreover, the company isn’t exorbitantly overvalued, trading at P/E ratio 22 vs. 20 for the S&P 500 according to Morningstar. On a forward basis the company trades at a P/E ratio of 18 vs. 18 for the S&P 500. This company deserves a spot in your portfolio.
William Bias (stockdissector) owns shares in 3M.