This is a guest post from Bob Ciura of Sure Dividend
Fears of coronavirus and slowing global economic growth have punished the U.S. stock market, particularly companies that are exposed to the global economy. Multi-national industrial manufacturers have been hit particularly hard, but we believe investors should remain focused on the long-term.
In our view, the weak performance of the stock market has presented multiple buying opportunities among high-quality dividend growth stocks. For example, the Dividend Kings have each raised their dividends for over 50 consecutive years. These stocks have the ability to continue increasing their dividends each year, regardless of the short-term challenges facing the global economy.
3M Company (MMM) is an example of a Dividend King trading at a discount. It is a blue-chip stock with a long history of dividend growth, and durable competitive advantages. With a nearly 4% dividend yield thanks to its recent dip in share price, 3M is a buy for long-term dividend growth investors.
Emerging Market Slowdown Hits 3M Hard
3M is a global industrial manufacturer. It sells more than 60,000 products that are used every day in homes, hospitals, office buildings and schools around the world. It has more than 90,000 employees and serves customers in more than 200 countries. The company is composed of four separate divisions.
The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software as well as manufactures personal protective gear and security products. The Healthcare segment supplies medical and surgical products as well as drug delivery systems. Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. Lastly, the Consumer division sells office supplies, home improvement products, protective materials and stationery supplies.
3M’s struggles in recent quarters were evident in the company’s most recent quarterly report. In the fourth quarter, 3M generated earnings-per-share of $1.95, a negative surprise which came $0.15 below estimates and represented a decline of 16% from the same quarter the previous year. Revenue improved 2% to $8.1 billion, though this was also below analyst estimates.
Organic growth was down 2.6% in local currency for the quarter. U.S. sales were lower by 2.9% and Japan declined 6.9%. Brazil had growth of 5.8%, Canada grew 2.6% and China/Hong Kong inched up 0.8%. Every remaining region declined year-over-year.
By product segment, Safety & Industrial sales were down 2.8%, and Transportation & Electronics revenue was lower by 5.9%. Even Healthcare, which had been 3M’s highest-growing segment in previous quarter, declined by 0.2%. Consumer was the lone segment to grow, improving by 0.2% due to increased sales in home improvement and home care.
For the year, adjusted earnings-per-share declined 13% to $9.10, and sales were lower by 1.9% to $32 billion. All in all, 2019 was a weak year for 3M, and in response the company announced that it would lay off 1,500 employees across its businesses and geographies. The company took a $134 million restructuring charge in the fourth quarter and expects pre-tax savings of at least $110 million annually.
Long-Term Growth Drivers Remain Intact
While the market obsesses about the impact of coronavirus, we view this as a short-term challenge. Over the long-term, the fundamentals of 3M’s future growth remain intact. Specifically, 3M’s presence in emerging markets such as China should be a major tailwind for future growth. 3M’s emerging market exposure gives the company a foothold in under-developed nations which have large populations and are generating much higher economic growth than more developed nations.
3M has another compelling long-term growth catalyst in the form of its health care exposure. Health care is an additional long-term growth catalyst, due to the aging population in the U.S. and many other nations. The corresponding demand for health care will be a separate tailwind for 3M’s growth. The company is expanding heavily in this area, to meet the future demand. For example, 3M’s nearly $7 billion acquisition of Acelity will further boost its growth potential in health care.
Acelity is a leading global manufacturer of advanced wound care and surgical products. It has a large and diverse product portfolio which provides it with high market share. The company generates annual revenue of approximately $1.5 billion. Acelity is a growing business. It reported 5% organic sales growth and over 10% EBITDA growth year-to-date, through the 2019 third quarter.
And, even though 2019 was a challenging year for 3M, the company still expects at least some growth in 2020. 3M expects organic local currency growth of 1% at the midpoint of guidance, and has guided towards earnings-per-share in a range of $9.30 to $9.75 for 2020. The company will still remain highly profitable, which gives it the ability to continue paying and raising its dividend each year.
Valuation, Dividend & Expected Returns
Based on management guidance for 2020, 3M stock trades for a price-to-earnings ratio of 16.1x. In our view, a reasonable fair value multiple for 3M is a price-to-earnings ratio of 16.5x. This represents a realistic valuation for a highly profitable company with a long history of growth and dividends. If the valuation multiple expands to 16.5x, shareholders would see a slight boost to annual returns.
The bulk of 3M’s future returns to shareholders will be comprised of earnings growth and dividends. We expect 5% annual EPS growth for 3M over full economic cycles. In addition, the stock has a current dividend yield of 3.9%. Add it all up, and shareholder returns could reach nearly 10% per year over the next five years. This is an attractive rate of return for a high-quality Dividend King.
Despite the recent operational challenges presented by weak global economic activity, 3M continues to generate healthy cash flow. To that end, free cash flow for the most recent quarter grew 10% to an all-time record $5.4 billion. The company’s strong free cash flow allows it to continue returning cash to shareholders, including annual dividend increases. While 3M could continue to be weighed down by coronavirus fears in the near-term, it is a strong holding for long-term dividend growth investors.
BIO: Bob Ciura is Senior Vice President of Sure Dividend. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, he was an independent equity analyst. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
Be sure and follow me on your favorite social media platform:
MoreDividendsdotcom on Facebook
@MoreDividends on Twitter
If you would like to receive an email whenever I publish a new article: