3M
Co. (NYSE:MMM), which is a, highly diversified company producing industrial products
ranging from adhesives and abrasives to electronic circuits and optical films recently
stunned the Wall Street by declaring a 35% increase in dividend along with massive
share buyback plan. This naturally caused the 3M's stock to grow rapidly.
The
dividend hike also raised questions as to how the management could have
declared such a massive rise on the back of steady but rather modest growth in
the first three quarters of 2013. However, as we shall see below, the company's
balance sheet and its own guidelines for 2014 provide some justification for management's
enthusiasm.
3M's recent announcements
3M has been paying a dividend to shareholders for 97 years and has been
raising the dividend steadily for 50+ years. It is necessary to note, however
that its competitors Emerson Electric (NYSE:EMR) and Dover (NYSE:DOV) have also been increasing
dividends for 56 and 57 years respectively. However, their latest raises (the
57th and 58th respectively) were of the order of 5% and 7%. On the other hand,
CEO Inge Thulin led 3M to announcing a 35% increase in dividend to $3.20. This
can be compared to a dividend raise of 8% by 3M last year.
The company has declared that it will spend between $17 and $22 billion
in share buybacks over the next few years (2013-17). This is also significantly
higher when compared to its earlier estimates of $7.5 to $15 billion. Such
enthusiasm has surprised many analysts since the industrial giants are known to
have highly diversified business models which allow for steady but rather
unremarkable growth. 3M's organic growth for the first three quarters of 2013
has followed this slow and steady mode with diluted EPS and sales both growing
by 3% in the period.
The story of the balance sheet
It is evident that the growth figures of the past provide little
explanation for the company's prodigious dividend increase. Firstly, the
company has about $5.8 billion in debt, which is not terribly high for a
company of this size, especially if one considers the $3.3 billion that 3M has
in cash and short term equivalents. The company's cash on hand has almost
doubled compared to the Recession troughs of around $1.8 billion.
The company's payout ratio is not excessively high, even after the
dividend raise. As of now it has a trailing payout of 52%. Additionally, the
company has been buying back shares already with the current outstanding share count
being 673 million as compared to the five year high of 715 million. These
together indicate that the company has a decent balance sheet which will improve
further in the coming years.
The road ahead for 3M
Whereas the previous head of 3M had kept up a healthy growth rate
through acquisitions, Thuln invested in R&D which leads to delayed growth.
However, this growth is now starting to show, and it is expected that organic
growth rate will be between 4% to 6% for the next four years. The company states
that it expects earnings to grow by 3% to 6% in 2014, and rise by 10%. Further,
EPS for 2014 according to 3M should be in the range of $7.30 to $7.55, which is
broadly in line with analysts' estimates of $7.40 on revenue of $32.63 billion.
As such, the rise of dividend to $0.85 cents per share does not represent a significant
change in the payout ratio.
What about the downsides?
No company is without any potential downsides. 3M is currently subject to risk factors pertaining to worldwide
economic conditions, its ability to maintain its credit and borrowing
strategies, and competition and public perception of new products. Since 3M
operates in over 70 countries worldwide, it’s subject to a vast number of
different social, political and economic factors that could potentially harm
its business.
Since 3M currently has an AA- credit rating from S&P, it is able to procure
financing at lower costs. The maintenance of this credit rating is crucial to
its ability to continue to borrow.
Of course, the public must continue to favor 3M's products and respond
positively to new ones, in order for the company to continue to perform.
Many of these downsides are constant across any company, which means
that the positives for 3M will outweigh any negatives. It should result in a
more positive future for 3M.
The investor's decision
The fact that 3M has done something unique by raising its dividend by
35% and announcing a massive buyback program cannot be overlooked. However, it
is equally unprofitable to seek evidence in the company's balance sheet or
future growth possibilities which will convincingly prove that the management's
optimism is unfounded. In all likelihood, the company will continue expanding. Though
another massive raise may not be in the offing in the short term, further
dividend raises are a distinct possibility given the company's long history of
regular dividend increases. These factors make the company a definite
"buy" for both existing shareholders of the company as well as those
seeking a stable stock with consistent dividend growth.
Author: Justin Martin
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