3M Stock Today
3M (MMM) is one of the most popular dividend stocks today in the stock market. Dividend growth investors regard 3M as a Dividend King since it has grown its dividend for the past 62 years in a row. This research article will explore 3M stock’s business model, the company’s valuation, and explain why an investor might want to hold this over $100 billion diverse conglomerate today if inflation materially rises over the next year. 3M stock may not be as undervalued today as it was during the market nadir of the COVID-19 pandemic when the yield was over 4% but it has proven itself over time.
Overview of 3M
3M’s business product line is very diversified in terms of product offerings, with over 60,000 products. Some of their most notable brands are Post-It, Scotch Brite, Scotch, and Nexcare. Below are some of 3M’s notable brands.
3M’s Revenue, Earnings, and Free Cash Flow Growth
In the fiscal year, 2020 3M made $32.18 billion dollars; their revenue segments are broken down into four main categories: Safety and Industrial at 34% of total revenue, Transportation and Electronics at 26% of total revenue, Health Care at 24% of total revenue, and Consumer at 16%of total revenue. All their product offerings are essential brands in their respective areas, and the company holds key patents which add a large moat to 3M’s business. This is beneficial to investors since 3M has a long-lasting brand that will not succumb to competitive pressure. When it comes to the long-term stability of the business model, unlike other long-term dividend payers there doesn’t seem to be much that might disrupt them. The strong moat of the firm has allowed them to generate long term EPS growth and return more of FCF to shareholders over time.
All this diversification has some downsides as 3M has been struggling to increase revenues over the past 10 years. 3M has only managed to increase revenue by 20% this past decade from $26.66 billion to $32.18 billion due to various factors such as acquisitions and divestures. As a result of this slow growth, 3M’s management team began restructuring the company for growth long term in 2020. Long-term, investors expect the Consumer and Healthcare segments to strengthen, allowing the company to continue to expand. Due to the pandemic in 2020, the business saw a substantial increase in health care and home improvement items during the pandemic. Meanwhile, Transportation and Electronics suffered more setbacks because of people staying at home.
3M stock’s business segments are today all in growth mode for 2021, with revenues expected to climb by 3% – 6%. In 2021 EPS is expected to come in at $9.20 – $9.70 range. Giving this stock a forward P/E of ~20 which aligns with historical expectations. Looking at year-over-year performance already with last quarter’s Q1 2020 report the business saw a great improvement to key areas of growth not seen in the recent past. From Q1-2020 to Q1-2021, 3M saw a 9.6% Y/Y growth which is strong growth for a company that usually grows the percentage of inflation. The United States shutting down in March 2020 is a contribution to this rapid year over year growth since comparisons were relatively easy.
Even though revenue is not growing fast the company has managed to grow EPS through savings in operating expenses, increases in profit margin, and share buybacks. Over the last decade, EPS has grown 66.58%, from $5.83 to $9.77. 3M is continuing to spend a lot of money on research and development, in 2019 they spent $1.9 billion which, should further solidify their growth trajectory going forward.
3M Stock’s Dividend, Dividend Safety, and Dividend Growth Today
The payout ratio of 63.57% appears to be good, and it gives us investors hope that they will continue to rise their dividend. Dividend distributions of more than 65% of earnings is excessive. 3M’s dividend safety has improved over the past few years and debt has come down. 3M stock has a 3.02% forward dividend yield today as of this writing and pays $5.92 yearly dividend. 3M’s dividend has grown at 7.48% rate during the previous five years. Dividends are expected to grow, as FCF is expected to rise at a similar rate. FCF has grown in the past three years by 4.23%, 7.22%, and 22.68% to $6.74 billion. 3M looks primed to grow FCF with its new savings in operating expenses, gross margin, and huge revenue growth in the next two years. This should support a rising dividend moving forward.
Valuation of 3M
In this part of the article, to analyze 3M’s fair value I used four different valuations to analyze the business: a DCF perpetuity model, an exit multiple, a comp model, and a dividend discount model (DDM). The rest of the paragraphs will have individual parts that explain how each of these models work generally to get a better understanding of the results.
Because 3M is not a high growth company, finding a solid long-term entry position that provides someone with a significant growth runway is critical. Long term, I believe this company has upside potential and is an excellent purchase for someone looking for an equity that will perform well during fears of higher-than-expected inflation. 3M is a very stable company that will not be disrupted like other companies in today’s fast-paced world.
3M Discounted Cash Flow Model
The first model I used is a discounted cash flow which discounts FCF based on the time value of money. Think a dollar today doesn’t equal a dollar tomorrow. The two main things to understand in this valuation approach are the cash flows and the discount rate in which you discount the cash flows (WACC) to find the value of the company. In the rest of this paragraph, I am using my assumptions to find the intrinsic value of the business. In terms of my DCF model valuation, I chose the most cautious approach possible, using analysts’ lowest sales forecasts for 2021 and 2022. Because of 3M’s new growth plan, I decided to take a very conservative 1.3% increase in sales year over year until 2030, which is still very sluggish growth. Because of the increase in gross margin over time. I raised the gross margin by 0.0027% year-over-year, which is a very small and cautious gain. In terms of marketing and administrative expenditures, I was likewise exceedingly careful, not decreasing it as a percentage of sales going forward. If 3M continues to restructure its growth plan operating expenses might slightly increase over the next three to five years as a percentage of revenue. I determined a beta of 0.85 by unlevering and levering the beta using comparable firm capital structures. What levering a beta means is adding the risk of capital structure to the beta which already accounts for the business risk. I found the cost of capital was fairly low at 4.95%. This can have a big impact on how the model discounts the cash flows in the perpetuity method. In terms of this method, I found the share price to be $225.58. It is very important to note I took very conservative growth multiples and averages in the past decade to get this number.
3M Exit Model
In terms of the EBITDA multiple, I took 14.50X as an exit multiple to arrive at a share price of $228.19. To find this, I multiplied the last year EBITDA (2030) cash flow as predicted to 14.50x. This is a simple multiple approach to valuation. As a consequence of averaging those two extremely cautious predictions, I determined that the price range in which I would buy this stock is a maximum of $225. Which has a potential upside of 12.5%. The Weighted Average Cost of Capital (WACC), which, as previously said, discounts the cash flows, is one of the major drivers that might alter this model. I increased the WACC to 5.15% a slight margin of error for the model, accounting for the higher beta risk that I found on the Yahoo Finance’s website and found that the perpetuity model is still offering a very slight upside of 2%.
3M Comp Model
In the comp model this is a simple multiple approach to valuation where I averaged the competitors EV/EBITDA and EV/REV and multiplied it with 3M’s current EBITDA and REV to find the enterprise value of the firm. As a consequence, I determined that the share price is $171.65 in terms of EV/REV and $287.89 in terms of EV/EBITDA. This demonstrates that 3M is significantly more profitable in terms of EBITDA than its competitors and is overpriced in terms of sales. The EV/EBITDA of 3M is 13.27X vs. the average of 19.40X by its competitors showing that 3M might be undervalued. While looking at EV/REV shows the firm might be just in line with expectations as the average competitors trade at 3.48X while 3M trades at 3.70X.
3M Dividend Discount Model (DDM)
The dividend discount model was the last model I created. The difficulty is that if your average dividend growth rate is higher than your WACC, you’ll receive a negative result using this approach. I calculated the dividend growth rate to be 2.6%, and the WACC I used was 4.95% which resulted in a price per share of $260 based on the previous several years of growth where dividends have tapered off significantly.
What this tells me is that if we take a weighted average of all these models, I obtain an estimated fair value of $210 – $240 per share on average. Currently, the stock is trading at about $200 per share, which I believe is undervalued if you take a long-term approach to owning the stock.
Final Thoughts on 3M Stock Today
Looking at 3M stock today, I’d feel comfortable purchasing this now since it has a lot of potential for the firm to outperform due to the long-term commitment of the management team. I also feel this company is a good investment if you want security that performs well if inflation rates continue to rise in the future. I believe in the long-term moat of the company and its ability to continue to be able to grow and raise dividends over the coming years in its potential newfound renaissance of cost savings and top-line growth which will be rewarding to patient investors long term.
Thanks for reading 3M Stock Today!
Disclosure: The author does not have a position in 3M.
Author Bio: TK is a 21-year-old student studying finance in college seeking a job in finance. He enjoys learning about disruptive stocks and businesses in his free time. He specializes in valuation and M&A.
Disclaimer: It is also important to note past performance does not equal future performance.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.