Stock Analysis
- United States
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- Industrials
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- NYSE:MMM
3M's (NYSE:MMM) Stable Cash Flows and High Yield make it a Rare Dividend Opportunity
3M ( NYSE:MMM ) is a US Industrials company that operates in the: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer segments. The company is mature and well known to investors both as a return and a dividend stock. Today, we are goring to revise the company's fundamentals in light of the new full year report, and also look at the company from a dividend investor's perspective.
Check out our latest analysis for 3M
First, let's go over the highlights of 2021 for 3M:
- 2021 Revenue of US$35.3b
- 2021 EBIT US$7.3b, margin 20.6%
- Net Income US$5.9b, margin 16.7%
- Free Cash Flow US$5.8b, returned US$5.6b in dividends and buybacks
The company has a diversified product portfolio, however a part of it consists of personal protective equipment, such as N95 masks.
There is a likelihood that in 2022 the demand for PPE will significantly drop, which will have an effect on the income of 3M.
Here are the segment revenues for 3M:
| Segments revenue for FY2021 | USD $ in Billions | % from Total |
| Safety & Industrial | 12.8 | 36.2% |
| Transportation & Electronics | 9.8 | 27.7% |
| Health Care | 9.1 | 25.7% |
| Consumer | 5.9 | 16.7% |
| Total | 35.3 | 100% |
As we can see from the table above, and the company's financial history , even if there were a significant drop in demand for PPE, 3M has other sources of income to offset this and there even is a chance that organic growth will make up for the loss.
Valuation
The company also reported a return on invested capital of 19%, and from our data, we estimate a return on capital employed of 20.2%. Both metrics are similar, and by comparing them to the estimated cost of capital of 7.2%, we see that the return nicely surpasses the cost, which means that the company is well managed and is creating value for investors.
Now that we have the fundamentals, we can build a rough valuation model for the company.
Our free cash flow to equity model suggests that 3M has an intrinsic value of US$132.5b, or US$231 per share. This is a potential 28% upside, on the basis that the future cash flows and company lifetime value is undervalued by today's market.
Note that valuation models are complex and incorporate multiple assumptions. Investors widely disagree on the value of a company, and our models only serve to give an informative perspective on value, not to be regarded as a true representation.
Dividend Analysis
Investors can utilize different strategies on stocks. Some trade in the short term, some invest hoping that the price goes up, and others invest in order to get a consistent income in the form of dividends. Companies that are more mature, and at the end of their growth stage, are more appropriate as part of the dividend section of an investor's portfolio.
Looking at 3M, we see some good dividend qualities in the stock, and here is why.
3M has a dividend yield of 3.6%, which puts it in the top 25% of the market , and nicely above the 2.2% industry average. A dividend yield like this can double an investment in 20 years with compounding & reinvestment, or in 28 years without.
High dividend yields can be risky, and the best case scenario for investors is that a high yield is caused by a temporary situation while the fundamentals remain strong.
In the chart below, we can see the relationship between yield, dividends per share and earnings.
3M Has A Solid Track Record
The company has an extended history of paying stable dividends.Since 2012, the dividend has gone from US$2.20 to US$5.92. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time.
The Dividend's Growth Prospects
Earnings per share has been crawling upwards at 4.4% per year.The company has been growing at a pretty soft 4.4% per annum, and is paying out quite a lot of its earnings to shareholders - a 58% payout ratio or 96.5% with buybacks.
A payout ratio shows how much of the free cash flows of the company are returned to investors in the form of dividends. We can slightly modify this to include buybacks if we want to know the total payout to shareholders.
As we have seen before, even at the current pace, dividends are well covered by earnings and cash flows, so the financial obligations of the company are not at risk.
Conclusion
3M is a stable, possibly undervalued company, that has a 3.6% dividend yield, which puts it in the top 25% of dividend paying companies in the market.
The company has limited growth opportunities, but has strong and consistent fundamentals, which are not likely to put the dividend at risk. The company's history also indicates that they are increasing dividends per share in the long term.
Distributions are covered by earnings, which are also being converted to cash flows.Taking this all into consideration, this looks like it could be a good dividend opportunity.
Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
What are the risks and opportunities for 3M?
3M Company provides diversified technology services in the United States and internationally.
Rewards
Trading at 35% below our estimate of its fair value
Earnings are forecast to grow 6.31% per year
Risks
Significant insider selling over the past 3 months
Large one-off items impacting financial results
Has a high level of debt
Further research on
3M
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Goran Damchevski
Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors.
About NYSE:MMM
3M
3M Company provides diversified technology services in the United States and internationally.
Very undervalued 6 star dividend payer.
