Tuesday, March 8, 2016

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. Since MMM's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 8.8% discount to its calculated fair value of $175.45. 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 two Stars in this section for 1.) 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. 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 58 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 $925. 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 2.75% exceeds the 2.67% estimated 20-year average MMA rate.

Peers: The company's peer group includes: General Electric Co. (GE) with a 3.2% yield, Raven Industries Inc. (RAVN) with a 3.4% yield and Carlisle Companies Inc. (CSL) with a 1.3% yield.

Conclusion: MMM earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks MMM as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $201.70 before MMM's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 58 years of consecutive dividend increases. At that price the stock would yield 2.2%.

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 5.1%. This dividend growth rate is lower than the 7.3% 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, with only modest capital investment. The company's debt to total capital of 45% is slightly above my desired maximum of 45%. 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 $175.45. 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 (1.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio Holdings here.

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Tags: MMM, GE, RAVN, CSL,

2 comments:

  1. I don't understand if in your opinion is below the fair value you calculated, or "MMM is trading at a premium to all four valuations..."
    thanks

    ReplyDelete
    Replies
    1. "When also considering the NPV MMA Differential, the stock is trading at a 8.8% discount to its calculated fair value of $175.45."

      D4L

      Delete

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