Dividend Aristocrat Delivers 20% Annual Dividend Hike, Focuses on Innovation to Drive Global Revenue Growth, Boosts Buybacks
Annual dividend increased 20% from $3.42 per share in 2014 to $4.10 per share in 2015
Bullish share price target of $195 represents 17% upside potential
Record Q4 2014 sales of $7.72 billion grow earnings 12% to $1.81 per share
3M Company (NYSE: MMM) is global diversified technology company that produces over 55,000 products with operations in 70 countries. The company has 127 plant sites, 35 country laboratories and 4,000 research and development offices across the globe. 3M has five business segments: Consumer, Electronics & Energy, Health Care, Industrial and Safety & Graphics. The company produces solutions for customers in several industries including automotive, construction, dental, electronics, food manufacturing, hospitals, packaging and printing.
At $167, Shares 17% Short of $195 Bullish Estimate
As of market close on April 10, 2015, 3M shares were at $167.07, close to the high end of the company’s 52-week range of $130.60 – $170.50, giving the company a market capitalization of $106 billion. Shares closed slightly above the company’s 50-day moving average of $165.96 and well above the company’s 200-day moving average of $158.49. 3M shares have climbed 23% over the past year and delivered almost a 100% return over the past five years (doubling in value). With shares at $167 and the company reporting earnings per share of $7.49, 3M has a price-to-earnings ratio of 22.3x, 17.3x cash flow.
3M’s shares were recently maintained with an Equal-weight rating and price target of $157 by British bank Barclays (BCS) and 3M has a consensus analyst price target of $164 with a high of $195 and a low of $150. Relative to the high, shares could still increase significantly above current levels. Wealth management group Merrill Lynch is bullish on 3M, giving the company a share price target of $190 which represents upside potential of 14% over its recent close at $167.
Dividend Aristocrat Increases Quarterly Dividend 20%, Plans to Spend $22 Billion on Share Buybacks
In February 2015, 3M authorized a $12 billion share repurchase agreement, replacing the previous agreement of $7.5 billion established in February 2013. The company expects to repurchase as much as $22 billion of shares through 2017, which reflects management’s confidence in the company’s future share price growth potential over current levels.
3M has consecutively paid dividends since 1917 and increased dividends over the past 56 years – supported by strong cash flow, careful financial management and the growth of innovative, patent-protected revenue streams.
Additionally, management announced plans to increase 3M’s quarterly dividend to $1.025 per share (annualized at $4.10), up 20% from $0.855 (annualized at $3.42) for the previous quarter. This marks the 57th consecutive annual dividend increase and the 98th year of uninterrupted dividend payments to shareholders. The Q1 2015 dividend was paid to shareholders on March 12, 2015. 3M shares now offer a dividend yield of 2.5%.
In Q4 2014, 3M paid shareholders $544 million in dividends and repurchased $1.3 billion shares. For full-year 2014, the company paid $2.2 billion in dividends and repurchased $5.7 billion shares back.
3M is one of the leading members of the prestigious Dividend Aristocrats index for having increased dividends consecutively over the past 25 years. This latest 20% annual increase cements the company’s top-tier dividend credentials. This is truly a stock that has rewarded investors well over the long-term.
Rapidly Expanding Product Portfolio and Global Sales Footprint
Approximately 33% of the company’s products did not exist in 2010 and management continues to identify areas that need solutions to spur growth. Founded in 1902, 3M has grown into an international conglomerate with approximately $32 billion in sales for 2014.
The Consumer segment produces household, construction, clothing and office solutions. The segment has leading market positions in tape, repositionable notes, air filtration, home cleaning products and bandages. For 2014, the Consumer segment had $4.52 billion in sales with 57% coming from the US.
The Electronics & Energy segment produces telecommunications, optical film, renewable energy components and monitors. The segment has leading market positions in optical adhesives, LVD displays, electric and insulation tapes, and telecommunication copper splicing. For 2014, the Electronics & Energy segment had $5.60 billion in sales with 64% coming from the Asia-Pacific.
The Health Care segment produces medical supplies, infection prevention products, dental and food safety products. The segment has leading market positions in wound care dressings, oral care solutions, inhalation systems and food safety indicator solutions. For 2014, the Health Care segment had $5.57 billion in sales with 45% coming from the US.
The Industrial segment produces tapes, specialty materials, automotive components, paint and detail products, abrasion-resistant films and filtration products. The segment has leading market positions in personal hygiene tapes, car care DIY, automotive repair solutions and filtration systems. For 2014, the Industrial segment had $10.99 billion in sales with 38% coming from the US.
The Safety & Graphics segment produces personal protection products, traffic and safety products, graphic systems, commercial cleaning products, floor matting and roofing materials. The segment has leading market positions in personal protection products, reflective material for construction and automobiles, graphic films, roofing granules, building safety solutions and architectural design solutions. For 2014, the Safety & Graphic segment had $5.73 billion in sales with 36% coming from the US.
Recent Product Innovations That Drive Growth
3M launched Petrifilm Rapid Aerobic Count Plate which tests food matrices for aerobic bacteria accounts in just 24 hours to ensure the quality and safety of food manufacturers’ products. The product reduces costs by efficiently testing food matrices and avoiding retesting or time delays. A reduced size maximizes the laboratory space for companies. Currently 91 of 100 of the top food processing companies use 3M testing products. The Petrifilm Rapid Plate is certified by the USDA and FDA BAM.
The company also launched the Emphaze AEX Hybrid Purifier which uses advanced polymer materials, fine fiber nonwovens and membranes in purification processes used by biopharmaceutical companies. The advanced technology saves companies money by removing problematic impurities in the early stages, thereby improving efficiency and productivity at the end stage.
Enterprise Resource Planning (ERP) Paves Way for European Profit Margin Growth
3M has started its ERP roll-out in Europe, with $1.1 to $1.2 billion committed towards improving customer service levels and reducing time to market on new products. ERP systems will lower the cost of goods sold, improve inventory management and boost tax savings. Management expects annual operational savings of $500 to $700 million and working capital improvement of $500 million by 2020. Improved margins will deliver higher cash flow.
Continued Investment in High-Growth China Market
3M announced plans to construct a new customer technical center in Chengdu, China, expanding on its 50 centers around the world. The West Region Technical Center will be strategically located in a technology park area of Chengdu to take advantage of the geographic location and market potential. 3M builds technical centers to show local customers how its science-based solutions can work in their everyday lives. The company currently has regional headquarters in Shanghai as part of a strategic plan and commitment to promote strong growth in China. 3M has been in China since 1984 and has invested over $1 billion in growing 3M China into a regional giant with over 8,000 employees.
Ethical Business Practices – Key Competitive Differentiator
Management consulting firm Ethisphere Institute named 3M as a ‘World’s Most Ethical Company’ for the second year in a row. Ethisphere compiles a list of companies that combine improved company performance with ethical business practices and transparency for all levels of the company. The firm noted that 3M’s compliance and ethics program was upheld on a multinational level that created strong social responsibility and corporate citizenship. 3M Chief Compliance Officer Jim Zappa credited the ethical standards of the company to its Code of Conduct.
3M established a new policy to ethically source the wood, pulp and paper used in production of its products. The company will not accept any wood linked to deforestation or illegal logging as well as wood that effects endangered species, threatened forests, vulnerable works and indigenous people. Public reports will be available twice a year for review.
Aggressive Patent Protection Protects Revenue, Innovation Investments
On March 6, 2015, 3M filed a patent infringement lawsuit against German medical device maker Dental Direkt GmbH for using its patented coloring of ceramic-based dental restorations in several of their products. 3M has established agreements with several companies both domestically and internationally to use the technology and its dental division, 3M ESPE, also uses the technology.
Later in March, 3M filed another patent infringement lawsuit against dental products maker – Danville Materials – for using its patented nanofilter technology in their ZNano nanocomposite material. The technology improves the aesthetic quality, strength and wear resistance for dental restorations. 3M was the first company to use nanoparticles in dental composites.
3M is open to entering licensing agreements with companies to help leverage their technology and stablish new revenue streams.
Plans to Spend $10 Billion on Acquisitions Through 2017
In early 2015, 3M acquired the separations’ media business of filtration company Polypore International (PPO) for $1 billion in an all-cash deal. Management will merge the business with its own purification business and expand core filtration solutions across multiple high-growth segments utilizing 16 of 46 filtration technology platforms. The acquisition is expected to add $0.04 to recurring earnings per share in the first year after the deal is approved and completed.
3M also completed its acquisition of disinfection-device maker Ivera Medical Corporation which will now become a wholly-owned subsidiary under the company’s Critical and Chronic Care Solutions division. Ivera manufactures products that disinfect health care devices for patients with intravenous catheters, and most recently reported annual sales of about $30 million. 3M will add Ivera’s products, most notably their IV port connector caps, to its portfolio of vascular access products, increasing solutions for patients.
3M divested its global static control business to Desco Industries for an undisclosed amount. The static control business manufactured products to prevent and detect against electrostatic discharge, and had global sales of approximately $45 million. The divesture comes as part of management’s plan to focus on core operations and high-growth markets.
Stellar, Experienced Management Team
Inge Thulin was elected as Chairman of the Board, President and Chief Executive Officer of the company in February 2012. Mr. Thulin joined the company in 1979 and has held various roles with increasing responsibility. He served as a director on the Board for turf maintenance supplier Toro Company from 2007 to 2012 and was recently elected to the Board of Directors of energy giant Chevron Corporation (CVX).
Nicholas Gangestad rose to Chief Financial Officer after holding several financial positions with the company. Mr. Gangestad has over 28 years of financial experience with the company and oversees all financial aspects including investor relations, financial planning and strategic investments. He has international experience working in the Asia Pacific, Canada and Latin America.
Ashish Khandpur was appointed as Senior VP – Research and Development and Chief Technology Officer on July 14, 2014. Mr. Khandpur joined the company in 1995 and received several promotions related to technology positions within the company. He is responsible for the company’s research and development as well as the overall global technology strategy of the company.
Q4 2014 Earnings Rise 12% on Record $7.72 Billion in Sales
For the three months ended December 31, 2014, 3M had net sales of $7.72 billion (up 2%), operating income of $1.66 billion (up 5%), income before income taxes of $1.64 billion (up 5%), net income of $1.18 billion (up 7%), or $1.81 per share (up 12%).
As of December 31, 2014, 3M had $1.90 billion in cash and cash equivalents, $6.73 billion in long-term debt and $13.14 billion in total equity.
Management recently reaffirmed full-year 2015 expectations of earnings per share in the range of $8 – $8.30 on organic sales growth of 3% – 6% with free cash flow conversion of 90% – 100%. 3M will report Q1 2015 financial results on April 23, 2015.
3M is a long-standing Dividend Aristocrat that continues to raise dividends at solid double-digit rates while also delivering solid share price gains of 100% over the past five years. Management has delivered on dividend growth even through the toughest economic climate, supported by its product, industry and geographical diversity. Share trade near all-time highs but are still 17% short of bullish analyst estimates. Even at such levels, shares offer a solid 2.5% dividend yield with minimal downside and virtually guaranteed dividend growth. Moreover, management recently committed to $22 billion on share buybacks through 2017 which should further enhance shareholder value.