- 1 3M Company (MMM) has fallen out of favor with the investment community. Its share price has fallen ~$53 subsequent to April 24th; Q1 2019 results were released April 25th.
- 2 In previous articles I expressed my view that MMM shares were overvalued and disclosed my use of covered calls to skim additional income.
- 3 Despite challenges which are unlikely to be resolved in the short-term, I view MMM’s current valuation as attractive and will be acquiring additional shares.
- MMM has fallen out of favor with the investment community and its share price has dropped precipitously subsequent to the release of Q1 2019 results and is trading at ~64% of its January 2018 $258 high.
- Management is taking aggressive action to improve results as disclosed in Q1’s Earnings Call.
- MMM’s share price has pulled back to the extent where shares are attractively valued relative to historical levels.
- The time to invest in great companies is when they experience temporary challenges.
In recent months I have found it increasingly difficult to identify attractively valued companies and have employed to a greater extent conservative option strategies when I was not prepared to acquire shares. 3M (MMM) is an example of where I have employed the use of covered calls.
In this January article and this article in which I disclosed the use of covered calls on MMM. Following the release of MMM’s Q1 results on April 25, 2019 I wrote this article indicating that I would be writing additional covered calls.I recommended investors wait for a better valuation. I followed up that article with this
The outcome of the covered call contracts I wrote is that the May 17th $220 MMM covered calls expired worthless. This means I retained 100% of the option premium I collected and I still own the underlying shares.
Although there are still ~5 months before the October $210 covered calls expire I am currently ahead on this trade.
On the very rare occasion in 2019 I have disclosed my decision to acquire shares in companies I deemed to be fairly / attractively valued; please refer to the archives of this site where you can find links to my articles. With MMM now trading at $166.09 I no longer view MMM as being overvalued. As a result, I do not intend to write new covered calls and I intend to acquire additional shares.
Why I Like MMM
The following table shows the extent to which MMM is diversified.
I view my MMM investment from the perspective that:
- the company is profitable and generates strong Free Cash Flow from multiple business segments;
- senior management continues to expect 11 – 13% in annualized EPS growth in the 2019 – 2023 timeframe;
- the dividend which has increased for 60 years is well covered by earnings;
- being out of favor with the investment community has reduced MMM’s valuation to a level not seen in several years.
MMM certainly has a number of challenges to overcome in order to regain confidence from the investment community. In my opinion, these challenges are not insurmountable and I view MMM’s depressed valuation and ‘out of favor’ status as an opportunity in which to increase my exposure to one of my Top 10 holdings.
When I wrote my April 26th article, MMM was trading at ~$190 and I expressed my opinion that I expected the share price to drop further.
With FY2019 EPS guidance of $8.53 – $9.03 (Q1 2019 Earnings Release page 4 of 16) I arrived at a forward PE of ~21.04 – 22.27. In comparison, MMM’s PE for 2013 – 2018 was 21.54, 22.54, 19.46, 22.49, 26.27, and 25.54.
Fast forward to May 26th and we see that MMM is trading at $166.09. Using management’s guidance we arrive at a forward PE range of ~18.4 – ~19.5.
Dividend and Dividend Yield
The $5.76/year ($1.44/quarter) in dividends now provides investors with a ~3.47% dividend yield following the recent share price pullback. At the time of my April 26th article the dividend yield was ~3%.
I view the dividend as compensation for my patience while I wait for MMM’s valuation to return to historical levels.
In the past three decades I have acquired shares in great companies when they fell out of favor and became temporarily undervalued. In my opinion, the time to invest in great companies is not when investors are tripping over themselves to acquire shares. This is why I think now is the time to acquire MMM shares (if your investment time horizon is long-term).
Looking at MMM’s current valuation we see that it is favorable relative to that of recent years.
There is no disputing MMM faces challenges but the company is profitable and continues to generate significant Free Cash Flow.
Investors can also take some comfort in that MMM’s attractive dividend yield will partially compensate them while MMM works to regain confidence from the investment community.
I hope you found this article helpful and wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read 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 and will be acquiring additional shares within 72 hours.
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.