3M reported second-quarter earnings results in July. 25th, 2023. Revenue declined by 4.7% to $7,993 million, beating expectations by $440 million.
The adjusted earnings-per-share of $2.17 compared to $2.45 in the prior year was $0.41 above estimates.
Organic growth for the quarter was 2.5% as a lower U.S. dollar offset gains, while adjusted free cash flow was $1.5 billion, up 44% year-on-year. Reported net debt down 12% YoY to $11.7B.
3Mrevised its guidance for the year, with earnings–per–share expected from $8.50 to $9.00, up from $8.60 to $9.10. Organic growth is projected to be negative 3% to flat.
3M has grown earnings at a rate of 5.4% per year over the last decade.We are reaffirmingour expected growth rate of5% per year over the next five years.
3M has increased its dividend for the past65years, showing the company can thrive in various economic environments. This is a solid track record made possible by the company’s long-term priorities.
As stated earlier, 3M has a massive portfolio of products that continues to grow each year with new patents. 3M also invests heavily in new products, spending upward of almost $2 billion on research and development annually.
This investment has fueled the company’s long-term growth.
3M’s portfolio of products and innovation has allowed the company to raise its dividend each year.
The most recent increase of 0.7%, announced in February 2023, was a tiny increase below the company’s historical average growth rate.
However, the company is still recovering from the pandemic-related economic downturn. The company maintains one of the longest dividend growth streaks in the stock market.
The most significant event currently before the company and could affect its earnings moving forward is that 3M is facing several lawsuits. These include nearly 300,000 claims that its earplugs used by U.S. combat troops and produced by a subsidiary were defective.
Competitive Advantages & Recession Performance
Perhaps 3M’s most crucial competitive advantage is its innovation.
The company invests heavily in research and development. It’s even one of the relatively few companies that buy ideas from outsiders who have ideas on 3M’s patented products.
The company targets R&D spending equivalent to 6% of sales (~$2 billion annually) in order to create new products to meet consumer demand.
These investments have paid off handily for 3M, as it has more than 118,000 patents and receives roughly 4,000 new patents each year. Approximately 30% of sales during the last fiscal year were from products that didn’t exist five years ago.
Listed below are 3M’s adjusted earnings-per-share results before, during, and after the Great Recession:
As an industrial company, 3M is not immune to the effects of a recession. As seen above, the company suffered earnings declines in both 2008 and 2009. EPS fell 19.3% from 2007 through 2009.
However, 3M quickly rebounded and made a new EPS high the very next year.
While it is very likely that 3M’s results will suffer a double-digit decline in the next recession, the company’s product offerings and innovation will likely lead to a rebound during the following recovery.
Valuation & Expected Returns
Shares of 3M recently traded at $88.40, undergoing a massive decline lately following the ongoing lawsuit, as stated earlier. Nevertheless, we expect that 3M will produce earnings-per-share of $8.85 for the year. This gives the stock a price-to-earnings ratio of 9.9.
We have a five-year target price-to-earnings ratio of 17 for the stock. If the P/E multiple rose from 9.9 to 17 over the next five years, valuation expansion would boost returns by 10% per year.
Given the company’s prospects for growth and competitive advantages, we forecast an earnings growth rate of 5% annually over the next five years.
3M stock currently offers a dividend yield of 6.8%, which is above its own 10-year average yield as well as the average yield of the S&P 500.
3M’s dividend payout ratio of 68% indicates a safe dividend, with room for continued increases each year.
Putting it all together, the combination of multiple expansions, earnings growth, and dividends could generate returns of 21.8% per year over the next five years.
This may seem like an overblown annualized return potential, and it is. However, as legal risks overshadow MMM’s financials, the current stock price levels could present a fantastic buying opportunity, assuming any upcoming settlement doesn’t harm the company too much.
3M is currently facing significant headwinds, including a strong dollar and legal risks linked to the ongoing lawsuit.
Dividend increases have slowed down as the company preserves more cash flow for growth investment and upcoming settlements.
However, there is still a lot to like about 3M. The company spends heavily on R&D, which has allowed it to create numerous new products that add materially to its long-term growth.
And, 3M’s dividend track record is nearly unmatched, while the current 6.8% dividend yield is very attractive.
3M’s total projected returns could exceed 21.8% annually if the current lawsuit doesn’t annihilate its balance sheet. While risks persist, the stock is a buy in our view. We believe 3M has great potential as a long-term holding for income investors.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years. Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
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