3M Co. is expected to earn record profits this year and next. This will give this U.S.-based global manufacturing stock the means to keep rewarding its shareholders. While not cheap, 3M remains a buy.
3M Co. (NYSE─MMM) expects to earn record profits this year and next. It keeps raising your dividend and buying back its shares. 3M remains a buy for decent and growing dividends plus long-term share price gains. It is a dividend aristocrat that has raised its dividend for 59 years in a row.
3M is a diversified manufacturing and tech stock, with five operating segments. Its Industrial segment generated a third of the revenue of $30.9 billion and 30 per cent of its operating income of $7.440 billion (all numbers in U.S. dollars). Safety and Graphics accounted for 18 per cent of both the revenue and the operating income. Health Care produced 18 per cent of the revenue and 23 per cent of the operating income. Electronic and Energy generated 17 per cent of the revenue and 15 per cent of the operating income. And Consumer accounted for 14 per cent of both the revenue and operating income.
In 2016, 3M expects to earn from $8.10 to $8.45 a share. It’s expected to earn $8.29 cents a share this year. The earnings per share growth is expected to accelerate to 7.4 per cent this year.
Global manufacturing stock lays out 5-year plan
3M has laid out five-year financial objectives, covering 2016 through 2020. It expects its earnings per share to grow by eight to 12 per cent a year. Supporting this is two to five per cent sales growth (excluding foreign exchange rate changes). Also supporting the earnings growth is an expected 20 per cent return on invested capital. The company also plans to do 100 per cent ‘free cash flow conversion’.
The company recently released financial results for the first quarter 2016.
Operating income margins were up 1.3 per cent year-on-year to 24.1 percent; organic local-currency sales growth declined 0.8 percent; free cash flow increased 20 percent year-on-year to $946 million, and the first-quarter per share dividend increased by 8 percent, the 58th consecutive year of increases. First-quarter earnings rose 10.8 percent, to $2.05 per share, while sales declined 2.2 percent year-on-year to $7.4 billion. Operating income was $1.8 billion and operating income margins for the quarter were 24.1 percent, up 1.3 percentage points year-on-year. First-quarter net income was $1.3 billion and the company converted 74 percent of net income to free cash flow.
On March 30, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 for the accounting of employee share-based payments. 3M elected to adopt this new guidance ahead of the mandatory 2017 effective date for all U.S. public companies. The adoption of this ASU resulted in a first-quarter tax benefit to earnings of $0.10 per share, net of tax cost related to global cash optimization actions. Over the remainder of 2016, the company is planning to take further such actions, and as a result its full-year tax rate and earnings per share guidance remains unchanged. 3M paid $672 million in cash dividends to shareholders and repurchased $1.2 billion of its own shares during the quarter.
“Our team continued to execute the 3M playbook and delivered another solid operational performance in the first quarter,” said Inge G. Thulin, 3M’s chairman, president and chief executive officer. “We expanded 3M’s profitability, improved our cash flow generation, and increased margins over a full percentage point. At the same time, we continued to invest in the business – including opening a new, world-class laboratory in the United States – while returning cash to our shareholders.”
For full-year 2016, 3M maintained its forecast for earnings per share in the range of $8.10 to $8.45 with organic local-currency sales growth of 1 to 3 percent. 3M also continues to expect its tax rate to be in the range of 29.5 to 30.5 percent and free cash flow conversion in the range of 95 to 105 percent.
Free cash flow is net cash generated by operations less net capital spending. 3M writes that it “defines free cash flow conversion as free cash flow divided by net income attributable to 3M.” That is, we expect it to use its cash of $1.916 billion and its cash flow to raise dividends every year and to buy back its shares.
Chief executive officer Inge Thulin said that the financial objectives “reflect our confidence in driving efficient growth—that is, strong, sustainable growth and premium returns—well into the future. We remain focused on controlling the controllable, investing for the long term and leveraging our scientific capabilities to create even greater value for our customers and shareholders.”
The MoneyLetter, MPL Communications Inc. 133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846