Hello,
This is Div4Son,
When I ran my simple screen at the beginning of this month, I was surprised to see 3M on the list. I have incorporated a due diligence process to analyze stocks. This article is a summary of my 3M dividend stock analysis.
3M (MMM) Dividend Stock Analysis
About 3M
3M is a diversified manufacturer with well known products such as PostIt Notes and Scotch Tape as well less known products such as hightech LCD films etc. 3M is an international company with more than 60% of 3M's total revenue coming from outside the United States.
Divisions are listed below:
 Healthcare (18.6% of sales)
 Industrial & Transportation (30.8% sales)
 Consumer & Office (15% of sales)
 Display & Graphics(13.5% of sales)
 Electro & Communications (9.8% of sales)
 Safety, Security & Protection (13.8% of sales)
Criteria
3M 6/2015

Area

Criteria

CheckList

Comment

Quality Company

Dividend Growth

>5 years

Yes

45 years

ROE/EPS/Op Margin

Stable

Yes

See Chart
 
Long term Avg Growth

Stable

Yes

See Chart
 
FCF over Dividends

Yes

Yes

See Chart
 
M* Moat

Wide Moat

Yes

M* Wide
 
M* & S&P
Credit Rating

> BBB+

Yes

AA
 
Cash to Debt & Interest Coverage, Debt to Equity

Cash Debt >1 or Interest Coverage > 5

Yes

Cash to Debt 0.43
Interest Coverage 50.24
Debt to Equity 47.24
 
M* & S&P Stars

> 3 Stars for both

No

M* 3 Stars
S&P CapIQ 2 Stars A+ Quality
 
Payout Ratio

<60%

Yes

48.00%
 
Dividend Growth
& Yield

Dividend Yield

>3%

No

2.60%

Dividend Growth

>5%

Yes

9.70%
 
Chowder

>12%

Yes

12.30%
 
Valuation

Yield/Avg Yield

>1.1

Yes

1.13

Dividend Yield Theory Mid Point

Below Mid Point

No

Mid Point 154.1
Low Point 103
 
DRRM

~10%

Yes

Assuming 7% growth; projected return=10.72%
 
M* Estimate

<M* est

Yes

M* 160
 
S&P Estimate

< S&P cap IQ est

No

S&P Cap IQ 155

Note: data from M*, Yahoo, Gurufocus and CCC
Quality analysis
Years of Dividend raises
3M has 45 years of dividend raises. 3M dividend has been pretty stable.
Stability of key metrics
These ratios provide an indication of how wide the moat is. I am looking for overall stability (or even better  growth). If the ratios decline year over year, then this is an indication of moat reduction. I also compare these ratios with other companies within the same sectors.
3M ROE and Operating Margins are actually stable. This is a very strong indication of strong moat.
Free cash flow over dividends
I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.
As you can see 3M FCF YoY are easily covering the dividends.
Average growth
Here, I look for the stability of growth indicators over ten years using the EPS and Revenue.
From a 10 year perspective, EPS and Revenue are growing 58%. We will use the 7% in the later DDRM calculation as a reasonable rate of growth.
The 10 year and 3 year averages show reasonable growth with the running average being swayed by the recession.
M* Moat
I simply use the moat indicator from M* to validate my findings. M* indicates that 3M has a wide moat. This is due to 3Ms cost advantages with the number of products as well as its superior brand name.
Credit rating
Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.
3M’s credit rating from M* is AA.
Debt
I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden.
3M’s Cash to Debt 0.43 with Interest Coverage at around 50 which means the debt can be easily covered. The Debt to Equity is around 47 which is close at the 50% threshold.
Over the years, the debt to equity ratio is well controlled (under 60% for the last 10 years)
M* and S&P capital IQ rating
I am looking for 3 stars and above from either. A four/five star is a bonus.
M* gives 3M 3 Stars and S&P CapIQ gives 2 Stars with A+ quality company
3M combined stars is 5  which means it is NOT a good indication to buy.
Dividend Yield and growth
 Dividend yield is 2.6% which is below my threshold of 3%.
 5Y CAGR dividend growth is 9.70 which is higher my threshold of 5%.
 Chowder is around 12.3 which is above my 12% threshold.
YoY Dividend Growth is decent with a 20% dividend raise at the end of last year. The median is around 5% for the last 10 years.
Payout Ratio
The payout ratio for 3M for the recent quarter is around 48% which is below the threshold of 60%. YoY it is around 40%.
Earnings & Book Value
A recent question came up if the ROE is correlated with the earnings yield (Earning/Price). The following link provides further information on the earnings yield and relationship with ROE.
A lower book value indicates a more 'expensive' stock assuming the price is stable.
Note: The E/B numbers on this plot differ slightly with the above ROE numbers since it is normalized per share.
Value analysis
Average yield
The current yield per average yield for 5 years ratio is 1.13. I use this as a quick indicator for valuation.This basically means that 3M’'s current yield is 13% over the average yield.
Dividend yield theory Mid Point
Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.
Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividendyieldtheoryspreadsheet.html
I estimate the high and low yields to be:
High

4.00%

Low

2.00%

This gives the following high, mid and low price ranges.
High Price:

205.47

Mid Price:

154.10

Low Price:

102.73

3M current price is around $158159 which is over the mid price point.
Dividend Drill Return Model
Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 7% based on the growth information above.
DDRM
 
Dividend Rate ($)

4.11

Divided by: share price

158.05

Current yield (%)

2.60

Core Growth Estimate (%)

7.00

Divided by: ROE (%)

31.72

Multiplied by: EPS ($)

7.55

Cost of Growth (%)

1.67

Earnings per Share ($)

7.55

Minus: Dividend

4.11

Minus: Cost of Growth

1.67

Funding Gap ($)

1.77

Divided by: Share Price ($)

158.05

Share Change (%)

1.12

Core Growth (%)

7.00

Plus: Share Change (%)

1.12

Total Dividend Growth (%)

8.12

Plus: Dividend Yield (%)

2.60

Projected Total Return (%)

10.72

My threshold for total return is 10%. 3M’s projected total return is 10.7%.
Rearranging the numbers based on the dividend growth & 7% growth:
Dividend Rate ($)

4.11

Required Return (%)

10.00

Growth (%)

8.12

Price

218.90

Dividend Rate ($)

4.11

Required Return (%)

10.00

Growth (%)

7.00

Price

136.98

The average of the two is around 170s  but I prefer the 136 estimate which is close to the low rice point.
M* and S&P valuations
Morningstar gives 3M a target of $160. S&P capIQ gives a target of $155. Therefore, with a current price around $1589, 3M is slightly over the fair price point.
Risks
3M international exposure increases currency risks. They also face foreign competition with home turf advantage. This reduces their growth prospects.
Conclusion
3M is an excellent company with excellent fundamentals. The key is to buy at good valuations. Unfortunately, 3M at around $158/9 is currently slightly over my fair price point. If the price dips to the low 150s or below, then this may be a good entry point.
That's it for all. What do you think of 3M?
D4S
Hi D4S,
ReplyDeleteNice thorough analysis here. I just was checking out MMM this past week and came to similar conclusions. There appears to be some strong resistance around the $155 level. I suspect if it drops below that then it will head even lower which might just provide that good value buying time. Maybe just in time for my July buys!
Thanks for the research!
Adam, thanks for your comments.
DeleteI probably have to wait a few weeks before I can initiate a buy. Hopefully 3M will take a dip at that time. :)
D4S
Hi Div Son
ReplyDeleteVery nice analysis there.
Do you think the earnings yield for 3M warrants the high ROE the company is churning out? I'm pretty positive on the high ROE the company is generating in recent years.
B, thanks for your comments. Yes, if you look at the last couple of years the earnings per share is slowly rising while the book value per share is stagnant or slowly dropping (if you include the TTM also). Both of these points will raise the ROE.
DeleteD4S
Also, let me plot out the E/P with the P/B with ROE to show this relationship.
DeleteA dropping Book value also means a higher P/B.
D4S,
ReplyDeleteThat Criteria table you list there  is that something you came up with or did you get it from somewhere? I'm curious to know if it's automated or something you fill in to gauge stocks. I definitely like the way that presents the key information.
Just curious!
FM
FM, I created the criteria table in google sheets (though the format came from various sources/bloggers). It is mostly automated except that the checks are manually completed so that I double check the values. (I could add IF checks) Also, certain items require M* and capIQ subscription so these are not automated. In fact, I've automated most of the graphs/plots also. It is not "primetime" like my dividend yield theory spreadsheet so I haven't shared it. I'd happy to go through the details with you or write an article in the coming weeks on how to create the template.
DeleteD4S
Thank you for sharing this analysis of MMM. It's a great stock and company and I plan to keep it in my portfolio indefinitely. Even if buying this stock at less than stellar valuations you can still do quite well if holding with a long term horizon. That being said, I'd love to add to my MMM but find other opportunities more compelling.
ReplyDeleteDivHut, thanks for visiting. I agree with you that MMM is a good company to hold. I actually put a limit order in close to 155 but it was not triggered. Anyway, let's wait for the next round of dips.
ReplyDeleteD4S