Today, we report on one of the most durable dividend stocks in America. 3M Company has paid a dividend for the past 98 years and raised its payout for 57 consecutive years. The company is well-known for everyday products such as Scotch tape and Post-it notes, and it continues to spend steadily on the research and development of new products. 3M is also pursuing new technologies and new markets by means of acquisition—it has made three in 2015 alone. We look at how 3M’s strong market position and growth strategy help cut the risk that comes with multiple acquisitions.
3M has made a number of acquisitions in the past few years. Expanding this way is riskier than internal growth, as the buyer of something rarely knows as much about it as the seller. Hidden problems can lead to big writedowns, as Microsoft found out with its recent purchase of Nokia’s mobile phone operations (read our article The cloud powers Microsoft past Nokia stumble).
However, 3M’s recent purchases of companies that make medical supplies and safety equipment help offset the cyclical nature of its main businesses. Moreover, 3M is a leader in most of its markets. That means it can charge higher prices, particularly for new products that face little competition.
3M COMPANY (New York symbol MMM; www.3m.com) started up in 1902, when it was called the Minnesota Mining & Manufacturing Company.
3M started off making sandpaper and abrasives for industrial clients. It later developed other consumer and manufacturing-related goods, such as pressure-sensitive masking and packaging tape, recording tape and reflective highway markings.
Today, 3M makes more than 55,000 items, including air purifiers, medical device components and bandages. Top-selling brands include Post-it notes, Scotch tape, Scotch-Brite cleaning products, Scotchguard protection and Thinsulate insulation.
The company has five main business segments: industrial (which supplied 34% of its 2014 sales and 32% of its earnings), safety and graphics (18%, 17%), electronics and energy (17%, 15%) health care (17%, 23%) and consumer (14%, 13%).
The company has a presence in many countries. Sales from outside the U.S. now account for two-thirds of its total, up from around half in 2000.
Rising demand for 3M’s products following the 2008/09 recession pushed up its sales by 19.3%, from $26.7 billion in 2010 to $31.8 billion in 2014. Earnings gained 18.9%, from $4.2 billion in 2010 to $5.0 billion in 2014. 3M has repurchased roughly 11% of its outstanding shares over the past five years. As a result, its per-share earnings rose at a faster rate of 30.3%, from $5.75 to $7.49.
The company fuels its growth by constantly improving its existing products and developing new ones. In 2014, it spent 5.6% of its sales on research; it plans to boost that to 6.0% in 2017.
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Dividend stocks: After 3 acquisitions in 2015, strong balance sheet will let 3M keep expanding
In addition to its strong commitment to research, 3M uses acquisitions to get access to certain technologies or move into new markets.
For example, in 2012 it paid $798 million for Ceradyne, a maker of temperature-resistant ceramics. Manufacturers are increasingly using ceramic materials to make engine parts and other industrial products because they’re stronger and more rust-resistant than traditional metals and plastics. They also work together with less friction.
Two years later, in April 2014, 3M paid $94 million for Treo, which makes software that health plan providers use to collect and analyze patient data. That cuts these users’ costs and helps ensure they’re delivering the proper medical services.
In the first half of 2015, 3M announced three more purchases, the biggest of which is a $2.5-billion deal for Capital Safety, a Minnesota-based maker of harnesses, self-retracting lifelines and other gear for protecting workers from falls. Its clients are in the construction, mining and transportation industries.
Capital Safety looks like a good fit with 3M’s other safety equipment, such as protective eyewear, face masks and earplugs. Demand for these products is growing strongly as governments step up enforcement of safety regulations.
The company also paid $1.0 billion for Polypore International’s (New York symbol PPO) Separations Media division, which makes membranes and filters for a variety of industrial and health-care uses, including dialysis, purifying drugs and filtering water.
Finally, 3M paid $153 million for Ivera, which makes products that disinfect and protect medical devices that access a patient’s bloodstream.
The company’s strong balance sheet will let it keep expanding. As of June 30, 2015, its long-term debt was $8.4 billion, or just 9% of its market cap. It also held cash of $3.5 billion, or $5.58 a share.
Even after its recent acquisitions, goodwill and intangible assets totalled $8.3 billion, which is a low 9% of 3M’s market cap. Moreover, the company targets smaller firms that operate in niche markets and are easy to absorb. That reduces the chance of a large writedown if these businesses run into trouble.
Meantime, 3M aims to spur its earnings with a new computerized management system that will help it track and analyze data on things like raw materials, inventories and customer relationships. The company will spend $1.2 billion on this technology, but it expects it to cut $500 million to $700 million from its annual costs starting in 2020.
The high U.S. dollar is hurting the contribution of 3M’s overseas businesses, but its recent acquisitions should still increase its 2015 earnings by 4.5%, to $7.83 a share. The stock trades at 18.3 times that estimate. Earnings could reach $8.66 a share in 2016, and the stock trades at a more reasonable 16.5 times that figure.
The company has paid dividends without interruption for 98 years. It has also raised its payout annually for the past 57 years. The current annual rate of $4.10 yields 2.9%.
Recommendation in Wall Street Stock Forecaster: BUY
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