3M (NYSE: MMM)
QVI Research Report | Updated Coverage | March 2023
Summary
Despite its much-publicized product legal woes, 3M is the industrials sector’s patent leader and yields double-digits on a cost basis in the QVI Concentrated Portfolio.
Fundamentals and downside risks suggest a continued solid performance over the longer term.
Shareholder yields and valuation multiples remain attractive, indicating a discounted stock price.
Although QVI maintains its bullish view on 3M, the caveat is that thoughtful investors must decide whether it’s a quality-business-model value opportunity or a risk-heavy deep value play.
Premium (paying) subscribers: When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on March 29, 2023, and intended for illustration only.
3M Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
3M Company (NYSE: MMM) is a dividend-paying large-cap stock in the industrial conglomerates industry of the industrials sector. MMM was added to the QVI Concentrated Portfolio on July 21, 2010, at a split and dividend-adjusted $56.94 a share.
3M Company provides diversified technology services in the United States and internationally. The company operates through four segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
The Safety and Industrial segment offers industrial abrasives and finishing for metalworking applications; autobody repair solutions; closure systems for personal hygiene products, masking, and packaging materials; electrical products and materials for construction and maintenance, power distribution, and electrical original equipment manufacturers; structural adhesives and tapes; respiratory, hearing, eye, and fall protection solutions; and natural and color-coated mineral granules for shingles.
The Transportation and Electronics segment provides ceramic solutions; attachment tapes, films, sound, and temperature management for transport vehicles; large premium format graphic films for advertising and fleet signage; light management films and electronics assembly solutions; packaging and interconnection solutions; and reflective signage for highway, and vehicle safety.
The Healthcare segment offers healthcare procedure coding and reimbursement software; skin, wound care, and infection prevention products and solutions; dentistry and orthodontia solutions; and filtration and purification systems.
The Consumer segment provides consumer bandages, braces, supports, and consumer respirators; cleaning products for the home; retail abrasives, paint accessories, car care DIY products, picture hanging, and consumer air quality solutions; and stationery products. It offers its products through e-commerce and traditional wholesalers, retailers, jobbers, distributors, and dealers.
3M Company was founded in 1902 and is headquartered in St. Paul, Minnesota, USA.
QVI’s value proposition elevator pitch for 3M:
Despite its much-publicized product legal woes, 3M is the industrials sector’s patent leader and yields double-digits on a cost basis in the QVI Concentrated Portfolio.
Performance vs. Sector and Market
The chart below illustrates MMM’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of 3M in July 2010.
For example, after keeping pace from 2010 to 2019, MMM has grossly underperformed its industry and the broader market in total returns during the coverage timeframe. Notably, the stock tanked following public disclosure of the PFAS and ear plug litigations.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit 3M’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for 3M: Bullish.
MMM Total Returns vs. XLI and SPY
3M Co (MMM) Total Return: 78.91%
Industrial Select Sector SPDR ETF (XLI) Total Return: 341.0%
SPDR S&P 500 ETF Trust (SPY) Total Return: 371.4%
Since July 21, 2010 (as of March 29, 2023)MMM Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
MMM’s earnings yield traded above the targeted floor at 9.83%, as demonstrated in the below chart. Moreover, at 6.56%, MMM’s free cash flow yield traded just under the threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that MMM trades at a discount. QVI will further explore valuation multiples later in this report.
Dividend Yield
3M offers a robust forward dividend yield of 5.78%, supported by a moderate 59.01% payout ratio, thus indicating a safe dividend rate but with little room for additional annual increases.
MMM yielded 10.54% from an annual payout of $6.00 on a split- and dividend-adjusted cost basis of $56.94 per share on July 21, 2010, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was +476 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.56% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for MMM was 7.39% or +383 bps above the 10-Year and 8.98% or +542 bps above the Treasury yield when using QVI’s July 2010 yield-on-cost basis.
QVI’s shareholder yields rating for MMM: Bullish.
MMM Shareholder Yields
3M Co (MMM) Price: $103.22
3M Co (MMM) Earnings Yield: 9.83%
3M Co (MMM) Free Cash Flow Yield: 6.56%
3M Co (MMM) Dividend Yield: 5.78%
One-Year Trailing (as of March 29, 2023)3M Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, 3M had positive three-year annualized revenue growth of 2.13%, slightly underperforming the 3.52% median growth of the industrials sector.
Further down the income funnel, 3M had a trailing three-year double-digit net profit margin of 16.81%, easily beating the sector's median net margin of 6.50%.
Returns on Equity and Invested Capital
3M management produced a trailing three-year return on equity or ROE of 45.86%, tripling the targeted threshold and far outperforming the sector's median ROE of 13.86%.
Stock buyback programs often elevate ROE. For example, 3M's board of directors authorized stock repurchases of $32 billion over ten years through the end of 2022.
At 17.68%, 3M's three-year return on invested capital, or ROIC, is above the QVI threshold and trounces the sector's median ROIC of 7.01%, indicating that its senior executives are outstanding capital allocators.
In addition, 3M's ROIC covers its weighted average cost of capital, or WACC of 7.47%, adequately. (Source of WACC: GuruFocus).
Despite facing the tailwinds of the product liability lawsuits, 3M's management performance still benefits from positive revenue growth, plus double-digit and sector-beating net profit margin, return on equity, and return on invested capital. Of note, despite single-digit topline growth, the latter three metrics are each well above QVI's targeted thresholds.
QVI's fundamentals rating for 3M: Bullish.
MMM Returns on Management
3M Co (MMM) Revenue (3 Year Growth): 2.13%
3M Co (MMM) Profit Margin (3Y Median): 16.81%
3M Co (MMM) Return on Equity (3Y Median): 45.86%
3M Co (MMM) Return on Invested Capital (3Y Median): 17.68%
Three-Year Trailing (as of March 29, 2023)MMM Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, potential catalysts, and overall investment thesis of 3M Company (MMM). Let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through direct ownership of MMM common shares in our family portfolio. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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