3M: A Solid Opportunity For Dividend Growth Investors by Wealth Insights

Summary

• 3M Company has had a rough two years after hitting all-time highs in early 2018.
• While the short-term road could prove bumpy, 3M has a great long-term performance record, driven by strong operating metrics and dividend growth.
• 3M is a consistent wealth generator. The stock trades at a fair price for any investor looking to add some dividend growth to their portfolio.

With the markets near all-time highs, it can be tough to find a "deal" on quality stocks. In order to recognize value, one may need to broaden their vantage point to recognize when the market is offering an opportunity on a wonderful company in the face of short-term headwinds. We believe that the current state of 3M Company (MMM) represents such an opportunity for long-term dividend growth investors to take advantage of. After bubbling to all-time highs in early 2018, the stock has gradually declined. With shares now at $170, investors with a long-term holding period can obtain one of the best dividend growth stocks of all time for a reasonable valuation.

Value Proposition

As high as $256 per share in early 2018, the stock has declined considerably in less than two years. Shares have recently dipped as low as $150, and currently reside at $170 per share.

Source: YCharts

The decline in shares has been primarily caused by multiple instances of guidance cuts as well as layoffs in the face of a tough international market. The most recent quarter saw full-year adjusted EPS guidance cut to $8.99-9.09 from $9.25-9.75. This was already reduced from what was originally $10.45-10.90 at the beginning of the fiscal year. Sales have contracted, specifically in Europe/Middle East/Africa and Asia-Pacific where regions were down this past quarter 4.1% and 5%, respectively.

3M is an industrial conglomerate, so it has broad exposure to global economic conditions. The trade war between the US and China has begun to have a ripple effect that is seeing the global economy as a whole begin to slow down. As these ongoing conflicts continue to fester, companies such as 3M may see additional pressure on their operations.

So why is 3M appealing today, in the face of these headwinds? The sizable decline from 2018 highs has improved the valuation of shares despite the market trading near all-time highs. Even at the most recently reduced guidance of about $9 per share for the fiscal year, the stock's resulting earnings multiple of 18.89X is roughly in line with the stock's 10-year median P/E ratio of 19.38X.

And even though earnings are seeing downward pressure, 3M's value from a cash flow standpoint is near multi-year highs with a current FCF yield of 5.30%.

Source: YCharts

Shares aren't "once-in-a-lifetime" cheap, but the stock is certainly trading at a valuation that appears "fair" in a worst-case scenario. When you look deeper into the company itself, it becomes evident that 3M performs as a fantastic wealth creator when shares are acquired at a reasonable valuation and held for long periods of time.

3M Performs Over The Long Run

Typically, it's wise to shy away from economically-sensitive companies when fears of a recession arise. However, companies can sometimes be lumped into broad categories. In the case of 3M, the company has a strong long term track record - even in the face of recessionary environments.

Source: 3M Company

The reason for this is 3M's diverse industrial presence. The company sells many thousands of products across hundreds of industries. The company's four major business segments cover just about every notable application in modern society. That means that even during poor economic events, the company is able to navigate through it, and eventually come out stronger for it. Just look at the chart below as an example. 3M did suffer a notable downturn in 2008-2009 (one of the worst recessions in history). But today, that event is just a blip on a trajectory that has seen 3M soar well beyond that to new heights.

Source: YCharts

In other words, 3M's diverse footprint is virtually unsinkable over the long term. It has too strong a presence in too many markets for the company to risk serious distress in any realistic scenario. The driving forces behind this durability show up in the company's operating metrics.

Source: YCharts

The company generates strong cash flow streams (almost $0.15 of every dollar winds up as FCF), and management generates strong rates of return on the capital that it does invest. These strong operating metrics allow 3M to develop and grow valuable assets and resources that can be used to mold the company as management sees fit (an example being a recent $6.7-billion deal to acquire Acelity).

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Author Bio:

This article was written by Wealth Insights. A well-known investment author on Seeking Alpha with over 6,000 followers.

Steem Account: @wealth-insights
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