This article originally appeared on The DIV-Net February 16, 2009.
Linked here is a detailed quantitative analysis of 3M Co. (MMM). Below are some highlights from the above linked analysis:
Company Description: 3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
MMM is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, MMM is trading at a 41.2% discount. MMM earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
MMM earned one Star in this section for 3.) above. MMM has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 51 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
MMM earned both of the available Stars in this section. The NPV MMA Diff. of the $4,687 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as MMM has. MMM’s current yield of 4.08% exceeds the 3.42% estimated 20-year average MMA rate.
Other: MMM is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company has enjoyed strong historical earnings, dividend growth and free cash flow. In addition, the company has relatively low debt and a strong balance sheet. MMM’s has demonstrated the ability to generate strong returns on capital and free cash flows, and will likely continue to do so. Risks include slowing growth in most of MMM’s business units from the current economic situation, lower growth in the optical display business, integrating business acquisitions and less than planned cost-saving initiatives
Conclusion: MMM earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks MMM as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $55.76 before MMM’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 3.59%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 2.4%. This dividend growth rate is below the 4.2% used in this analysis. MMM has a risk rating of 1.25 which classifies it as a low risk stock.
The above information is based on dividends paid through 2008. Earlier this month MMM incresed its quarterly dividend 2% to $0.51/share. Using a dividend growth rate of 2% and holding all other thing equal, MMM’s NPV MMA Differential would drop to $2,723, which is below my required $3,000. At a 2% dividend growth rate, MMM drops to a 3 Star-Hold and my adjusted buy price would be $47.84.
I consider MMM to be an excellent long-term dividend stock and will continue to watch for opportunities to initiate a position below my buy price. For additional information, including MMM’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I did not have a position in MMM (0.0% of my Income Portfolio).
What are your thoughts on MMM?