Buy the Dips
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3M Company (NYSE: MMM) is responsible for many of the most widely distributed products in different industries, known among consumers for its popular Post-it Notes and Scotch tape, the company is involved in other businesses like healthcare, industrial transportation and communications. Both from the perspective of its product lines and in terms of geographical exposure, 3M is strongly diversified, which reduces the risk for investors in case of an economic slowdown.
None of these means that the company is immune to the business cycle. On the contrary, 3M is quite exposed to economic fluctuations, especially in its industrial operations. The company suffered a reduction in operating margins during years like 2008 and 2009, with operating profits falling by a 15.5% and 7.8% respectively. So the possibility of lower earnings due to a harsh economic environment is certainly a risk to consider, as illustrated by 3M's revenue composition below.
On the other hand, 3M has been able to deliver strong growth for a company of its size when measuring long periods of time. Over the last decade the company has increased its earnings per share at a 12% compounded annual growth rate. 3M has also been increasing its exposure to emerging markets over the last years, which makes it better positioned in terms of future growth opportunities.
The company has a very solid balance sheet, and has been capitalizing low interest rates in the last years to secure financing at a very attractive cost; 3M issued $1 billion in five year debt at a 1.375% in 2011. Over the decades 3M has used the strength of its balance sheet to increase the returns for its shareholders; as such the company has implemented an outstanding policy of cash distribution.
3M has returned almost 90% of net income to shareholders via a combination of dividends and share buybacks over the last 10 years, accumulating $17 billion in shares repurchase and $13 billion in cash dividends. The company yields 2.8% in dividends, and has paid dividends through the last 95 years in an uninterrupted fashion. Over the last 55 consecutive years 3M has increased its dividend payments, reflecting very positively on the company´s ability to sustain growing cash glows through various economic conditions.
When compared to other holdings like General Electric (NYSE: GE) and United Technologies (NYSE: UTX), 3M is not the cheapest alternative in terms of its price to earnings ratio or dividend yield, but the company excels in profitability. 3M has higher gross and operating margins, and also sports superior returns on assets and equity.
A negative economic scenario would hurt the company´s earnings, and investors seem to be 'pricing in' such a possibility as of late. But with history as a guide we could say that 3M is strong enough to recover from any temporary setback in the middle term, and in the meantime, investors will benefit from growing dividends and an active share buyback program.
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