U.S.-based global stock 3M Co. is expected to earn record profits this year and next. This will give it the means to keep rewarding its shareholders. While not cheap, 3M remains a buy.
We regularly review U.S.-based global stock 3M Co. (NYSE─MMM). Since we published our November 27, 2015, issue, its shares have risen by 7.1 per cent. The company expects to earn record profits this year and next. It keeps raising its dividend and buying back its shares. 3M remains a buy for decent and growing dividends plus long-term share price gains. It has raised its dividend for 59 years in a row.
3M is a diversified manufacturer and tech company, 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.
3M will also earn a record profit in 2016
In 2015, 3M earned a record $7.72 a share. This was up a modest 3.1 per cent from $7.49 a share, the year before. The high U.S. dollar cut the value of its profits in the 70 countries where it sells its products.
On the positive side, 3M spent $5.238 billion buying back its shares. This easily offset $635 million raised by issuing shares under stock option and benefit plans. On New Year’s Eve, the number of shares outstanding had fallen by 25,804,470 or 4.1 per cent. Dividing the earnings by fewer shares raises the earnings per share, of course. The company plans to buy back more shares this year.
3M is a ‘dividend aristocrat’ that has raised its dividends for 59 years in a row. 3M’s dividend of $4.44 a share yields a decent 2.9 per cent. 3M is likely to attract income-seeking investors who will bid up its share price. In addition, 3M buys back its shares each year. It plans to repurchase up to $10 billion worth of its shares this year.
In 2016, 3M expects to earn from $8.10 to $8.45 a share. The earnings-per-share growth is expected to accelerate to 7.4 per cent this year.
3M also 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’.
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 your dividends every year and to buy back its shares.
Chairman, president and 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 Investment Reporter, MPL Communications Inc.
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