Contents
Summary
- MMM released Q3 and YTD results on October 27th which exceeded my estimates used when I initiated a position in our daughter's non-registered account in May 2020.
- Current business conditions are such that MMM has discontinued the practice of providing guidance. It will maintain its monthly reporting of sales information during Q4 to continue to provide transparency on its ongoing business performance.
- Based on MMM's dividend track record and YTD profits and free cash flow I expect at least a $0.03/share/quarter dividend increase to be announced in early February 2021.
- Shares appear to be fairly valued so I have acquired additional shares @$162.
Introduction
Just a few days ago I was affixing our toll road transponder to the windshield of our newly acquired vehicle. The arrangement with the toll road operator is that you retain your transponder which is linked to your account and when you switch vehicles you merely order fasteners with which to attach the transponder to your windshield. When I received the fasteners I noticed they are manufactured by MMM. I am continually amazed at the frequency in which I come across 3M Company (MMM) products!
Should you be unfamilar with MMM's business I encourage you to review Part 1 - Item 1 in the 2019 10-K. Many investors are unaware that MMM has been granted more than 118,000 patents, and each year, more than 4,000 new patents are issued to MMM worldwide! Here is a very brief list of some of MMM's patent markings.
Interestingly, in MMM's history which is approaching 120 years, only 18 MMM inventors have reached the 100-patent mark. I highly encourage you to listen to this very brief video in which Audrey Sherman, a division scientist in the 3M Medical Solutions Division, discusses her 'road to 100'.
I mention all this because in my ongoing effort to help our daughter and her boyfriend build their respective registered and non-registered portfolios, I am continually looking to acquire undervalued / reasonably valued shares in high quality companies; I have disclosed in recent articles the purchases which have been made and in this May 21st article I disclosed that we had initiated a position in MMM. Furthermore, in this article I disclosed that MMM was one of our top 10 holdings.
Q3 and YTD 2020 Results
On October 27th, MMM released Q3 and YTD results which showed an improvement relative to Q2 (Q2 and Q3).
Credit Ratings
In my May 21st article I mentioned that I am not pleased to see a deterioration in MMM's credit ratings over the years. I am, therefore relieved to see that MMM ended Q3 with $4.6B in cash and marketable securities on-hand and that it reduced net debt by $1.3B, or 8 percent sequentially. Year-to-date, MMM has improved its net debt position by $2.8B, or 16%.
Valuation
When I wrote my most recent previous MMM article, I indicated that MMM had withdrawn its FY2020 guidance when it released its Q1 2020 results (presentation). I, therefore, used a conservative $2.05/quarter EPS over the next 3 quarters (it generated $2.22 in Q1 2020). At the time I wrote that article, I conservatively estimated MMM would generate $8.37 for FY2020. Shares were trading at ~$146.26 meaning MMM’s forward PE was ~17.48.
We now see that MMM has generated $6.87 in diluted EPS for the first 3 quarters of FY2020 with $2.22 and $2.43 having been generated in Q2 and Q3, respectively. If I proceed on the basis that MMM will generate $2.35 in EPS in Q4 it would end up with $9.30 in EPS for FY2020.
I have just acquired additional shares at $162 so using $9.30 in EPS we get a forward FY2020 PE of ~17.4 which is comparable to the level I calculated in May. For comparison purposes I see MMM’s 2010 – 2019 PE levels of 15.33, 13.90, 14.69, 21.54, 22.54, 19.46, 22.49, 26.27, 25.54, and 20.93.
All in all, MMM's current valuation appears reasonable from my perspective.
Dividend and Dividend Yield
Based on MMM's consistent dividend track record, investors can expect MMM to distribute its 4th consecutive $1.47 quarterly dividend in mid December. MMM declared a $0.03/share/quarter dividend increase in early February 2020 and I anticipate a similar dividend increase will be announced in early February 2021 despite the current challenging business climate. The company continues to be profitable and is generating strong free cash flow (~$4.5B in FCF in the first three quarters of the current fiscal year versus ~$3.57B and ~$3.14B for the same timeframe in FY2019 and FY2018).
Using a Q4 dividend of $1.47 and Q1 - Q3 2021 dividends of $1.50 we get a forward dividend of $5.97 which gives us a ~3.7% dividend yield on the basis of a $162 share price. Even after taking into account the 15% withholding tax my daughter will incur since shares are held in a non-registered account, the dividend yield is ~3.1%. I view this yield as respectable and fully expect the value of the dividend stream to increase over time.
Final Thoughts
At the time of my October 9, 2017 article I was of the opinion that MMM was significantly overvalued (PE in the mid 20s) yet many investors were tripping over themselves to acquire shares. This made little sense to me and I decided to bide my time and to wait for a better valuation so as to acquire additional shares. Now, with a PE of ~17.4 I think there is a far greater probability of being able to generate reasonable long-term returns with MMM.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long MMM.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
