Tuesday, October 13, 2015

3M Co. (MMM) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of 3M Company (MMM). Below are some highlights from the above linked analysis:

Company Description: 3M Co. provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MMM is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 14.6% discount to its calculated fair value of $175.46. MMM earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

MMM earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MMM earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 57 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

MMM earned a Star in this section for its NPV MMA Diff. of the $1,079. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MMM has. The stock's current yield of 2.74% exceeds the 2.51% estimated 20-year average MMA rate.

Peers: The company's peer group includes: General Electric Co. (GE) with a 3.4% yield, Raven Industries Inc. (RAVN) with a 3.0% yield and Carlisle Companies Inc. (CSL) with a 1.3% yield.

Conclusion: MMM earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks MMM as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $203.26 before MMM's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 57 years of consecutive dividend increases. At that price the stock would yield 2.0%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.8%. This dividend growth rate is lower than the 7.7% used in this analysis, thus providing a margin of safety. MMM has a risk rating of 1.25 which classifies it as a Low risk stock.

MMM is the leader in many of the markets its serves with a culture that thrives on innovation. Its bottom-line focus and low-cost manufacturing have built a wide moat around its core businesses. The company has enjoyed strong historical earnings, dividend growth and free cash flow. The company has relatively low debt and a strong balance sheet. It has demonstrated the ability to generate strong returns on capital.

The company has consistently returned significant cash to its shareholders through share repurchase and dividends. MMM is a great company with an excellent future. The stock is currently trading below my calculated fair value of $175.46. As such, I will continue to look for opportunities to add to my position, as my allocation allows.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in MMM (0.7% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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1 comment:

  1. good company and great stock...but I am not feeling that "fair value" point at this very moment....


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