3M has been a company on my watchlist for several years now. High quality companies often come with a price premium as to be expected. It is a company with fantastic products and has been a great grower of wealth over time. Now that shares have fallen 20% since their highs, shares now look attractive in my opinion. With that said, I finally bought shares of 3M and here’s why.
Who Is 3M?
For background if you aren’t tremendously familiar with 3M:
3M Co is a diversified technology company. It manufactures a diverse array of industrial and consumer products. Its business segments are Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer.
They are well known for Post-It notes, Scotch Tape, Scotchgard and Command strips. Their motto is about “applying science to life” which I completely love and makes for a company framework that you can root for.
In fact, a look on their product site lists over 20,000 products that are available for consumers and business.
As I started my journey investing in individual stocks, 3M has always been high on the list of companies to own. It should come as no surprise.
I highly recommend Fast Graphs for investors to consider subscribing to. At a quick glance there are several relevant data points that I would like to cover.
3M had been on my watchlist for since some time in 2015 and there was a brief opportunity to acquire shares around the $140 price point. At that time I declined as I had hoped they would fall further. As you can see, that did not happen. Shares continued to rally from that point all the way to their peak of $260 earlier this year. I would periodically review this chart and always be astonished at the valuation the market would give shares.
At their peak, shares were trading at approximately 27x earnings which is very expensive given the growth expected. I have no problem paying a reasonable valuation for companies that are growing but shares of Google for example were trading recently at 27x earnings though they were expecting about 27% earnings growth.
For this fiscal year management is expecting about 13% earnings growth which is great, I just wasn’t willing to pay 27x earnings for that type of growth. The company trades today at about 20x earnings and 19x using their forwarding earnings. In my opinion that is a much fairer price to pay for a wonderful company.
Total Return Opportunity
Now that shares have trended down and nearly back in line with historical valuation we can look to the future. As noted in the graph above, the best guess, is the 13% earnings growth this year and perhaps 10% earnings growth in 2019. Even if these expectations falls short, high single digit earnings growth should be achievable per year over the long term. In addition the company is renouned as a “Dividend King” for having grown their dividend every year for now over 60 years!
Taken from the recent investor presentation, the company highlighted their performance during 2017. Earnings grew over 12% on an adjusted basis, over $5B was invested into the business and nearly $5B was returned to shareholders through buybacks and dividends.
Based on one complete quarter in 2018, it seems that the company is on track to hit their earnings goal for the year. The $2.50 earned was nearly 16% higher than 2017 and they are pace for that approximately $10.35 in earnings. The company has a nice moat as evidenced by their 23% operating margin! The dividend was already increased by 16% this year which continues the long trend of increases.
This snippet was taken from the SimplySafeDividends website. The safety, growth and yield scores pit all companies against one another in a ranking to see who fares the best. The safety scores is a combination of quality factors such as a reasonable payout ratio, high credit rating amongst other. 3M ranks higher than 90% of companies within this universe. Growth has been great at an 81 and the yield is in the middle of the pack. That is to be expected as opportunities with high scores in all three categories are quite rare.
Though the current yield is a respectable 2.8%, that is still 50% higher than the overall market rate. Dividend growth investors with a long time horizon would be served well to buy and hold a core position in this company. Management has raised the dividend an average of 7.73% every year over the past 20 years! There are even spells where growth picks up as visible in the last 3 and 5 year period.
Don’t expect life shattering returns anytime soon, but 10% total returns seem achievable over the medium to long term.
7% earnings growth per year + 3% dividend yield = 10% returns possible
With the recent pullback in share price, investors are being presented with an opportunity to buy shares in this high quality company. This is not the cheapest price that has ever graced the company but I think represents a fair offer. The current yield is a respectable 2.8% and should continue to grow alongside growth in earnings.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.