3M: This dividend Royal will crush the market for the next 5 years – 3M Company (NYSE: MMM)

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As I have discussed in previous articles, I look at three factors before investing, in addition to the foundation of a company (ie, growth catalysts, financial strength, etc.).

The factors I refer to are current dividend yield, dividend security and dividend growth.

Although the first metric does not necessarily require a company to trade at a discount to fair value (assuming it is an excellent company), this company must act close to its fair value for me to justify further investigation.

After all, an investment can yield abnormally high returns, but it may well be a yield without growth potential, or worse, a yield that is moderate to high risk of being cut. This is the very definition of a return trap. If the proceeds seem too good to be true, it is often. There are exceptions to this rule, and finding these exceptions can prove to be a very lucrative investment strategy to discover a high-level company to determine whether the investment mission of that company is still intact.

Kraft Heinz (KHC) is a recent example of a return trap that comes to mind. Coincidentally, it was a company that I considered investing in about a year back. Ultimately, it was the debt, stagnant growth prospects and 3G's poor reputation that precludes the company from being an attractive dividend growth investment, in my opinion.

Image Source: Simply Safe Dividends

Fortunately, I didn't make that investment. Unfortunately for the Kraft Heinz shareholders, Kraft Heinz recently announced a 36% decline, not to mention news about a SEC survey and a $ 15.4 billion down to two iconic brands (Kraft and Oscar Mayer).

There are events like this Remind us that 1) Examination of dividend security (via independent research and simply secure dividends) is important, and 2) diversification is important. There are no investors who get all the investment right, and you won't be too dependent on an investment for your earnings when things go south.

This leads me to the next point that dividend security and dividend growth are of the utmost importance. As an investor, I will be reasonably confident that a dividend will not only be maintained, but will grow in the years to come.

Having said that, I think I have found an investment that is highly likely to meet these three preconditions before making an investment.

I refer to the Industrial Giant and Dividend King, 3M Company (MMM). We will discuss why I believe that 3M is set to deliver market-breaking returns over the next 5 years and beyond, delve into the dividend profile of 3M, the fundamentals of the company and the risks to consider, as well as the current share price in relation to my estimated fair value.

By doing so, we will arrive at my estimated annual total return of 3M over the next 5 years.

Reason # 1: A Safe and Growing Dividend

As I stated above, the dividend profile offered by a company is incredibly important for the selection process. In this section, I will know why I believe that 3M's 60-year dividend is safe and offers the potential for strong growth in the years ahead and how I came to this conclusion.

We shall first examine the security of 3M's dividends by deepening the company's ability to generate earnings per share and free cash flow against the current dividend obligation. My assessment of the dividend security will then be reconciled with the investment company Simply Safe Dividends.

Image Source: 3M Q4 2018 Earnings Presentation

As shown above, 3M GAAP EPS generated $ 8.89 in FY 2018 against $ 5.44 paid out during that time. This is equivalent to a 61.2% subsequent twelve-month EPS payout rate, which is on the elevated side of ~ 50% I like to see. However, the one-off events, including the TCJA adjustment, court settlement in Q1 2018 and the CMD provision will distort this payout ratio. Invoicing these outlets we will come to a TTM EPS payout rate of 54.6%, which is a bit more in line with what I like to see, which gives the company great capital to invest back in the business.

Image source: 3M Q4 2018 Profit Presentation

With an EPS center of $ 10.68, expected for FY 2019, This will indicate a 54.0% EPS payout forward relationship. This is again an almost perfect payout ratio that achieves a good balance between rewarding shareholders in the present while focusing on the future. It is no surprise that I would consider this benefit as very safe in the foreseeable future.

Then we will dive into the FCF payout rate over the next 12 months. On page 60 of the 3M's last 10-K, the company generated $ 6.439 billion in operating cash flow against $ 1.577 billion in investment, for total free cash flow of $ 4,482 billion in 2018. This is against $ 3,193 billion in dividends paid during that time , for a TTM FCF payout rate of 65.7%.

Image Source: 3M Q4 2018 Earnings presentation

In view of the latest dividend of 5.9%, the dividend paid in 2019 should be around NOK 3,381 billion. Assuming a 100% mid-point cash flow call, this means that free cash flow will be around $ 6.25 billion. This will entail a payment of dividends of 54.1%.

Using the FCF payout ratio, we come to the same conclusion that 3M's dividends are well covered and very safe. Image Source: Simply Safe Dividends

As shown above, our independent research and the conclusion on the safety of 3M's dividends was enhanced by Simply Safe Dividends.

These are calming information from my perspective as a dividend growth investor because Simply Safe Dividends has successfully predicted 98% of the dividend cuts since the beginning of 2015.

The 2% of the dividends that were not predicted in advance were generally due to the fact that there were smaller companies that changed the capital allocation policy and invested more in their business. Only Safe Dividends have learned from these cuts and now give lower scores to smaller companies with more dynamic capital allocation policies. There are also events that Simply Safe Dividends really cannot predict as the exploited suspension of PG & E in 2017 as a result of the investigation into the extensive California fire damage and PG & E's decision to preserve cash in case of being held liable for tune billions. for these injuries.

After discussing the safety of 3M's dividend, we will now cover the growth prospects for 3M's dividends in the years to come.

Image source: Simply Safe Dividends

As shown above, 3M has delivered impressive dividend growth in both the last 5 years and 20 years.

I think this trend will continue in the years ahead, mainly due to the growth estimates for 3M over the next 5 years.

With analysts on Yahoo Finance forecasts with 7.1% annual earnings growth over the next 5 years, and Nasdaq assumes 10.2% annual earnings growth over the same period, there seems to be a strong consensus that 3M will deliver high single digit earnings growth in the years to come.

Image Source: 3M Q4 2018 Earnings presentation

Given that the management stated in their 2019 capital allocation picture that they will grow their dividends in line With earnings, this gives good results for investors in the years to come.

We will now investigate why analysts are optimistic that 3M will be able to deliver the above-mentioned revenue growth in the coming years.

Cause # 2: Strong corporate culture and ability to exercise growth plans

With over 60,000 products used in businesses, homes, hospitals, and schools in over 200 countries around the world, 3M is a global industrial icon and conglomerate.

3M operates in five main segments, covering 46 technology platforms, including adhesives, abrasives, and nanotechnologies.

The record is a summary of 3M's sales for each segment.

The industry segment accounts for over one-third of sales (37%), according to Form 10-K (22% double-credit elimination accounts, 8%), and includes products such as tapes, sealants, abrasives, and adhesives used of automotive, construction and electronic companies.

The Security and Graphics segment accounts for 21% of sales and includes traffic security products, commercial security and cleaning agents, and personal protective equipment.

The health segment generates nearly one-fifth of sales (18%), and includes food safety products, healthcare computer systems, and dental and orthotic products.

The electronics and energy segment generate 17% of sales and include insulation, touch screens, renewable energy components, and infrastructure protection equipment.

The Consumer Products segment accounts for 15% of sales and includes the iconic post-it notes, tapes, sponges and adhesives.

This is the level of business segment diversification, as well as the geographic diversity of 3M's revenue that makes 3M a truly global and leading industrial conglomerate.

According to page 84 of the 3M Form 10 -K, 3M generated almost half of its pre-tax earnings or EBIT in the US (49.8%), while the other half (50.2%) was generated internationally.

The size and scope of this company is simply impossible to replicate overnight. Not only do you start an industrial conglomerate in the garage and compete with 3M.

It is this size that gives 3M a shell value which gives it an advantage over its smaller industrial competitors. This is the basis for broad moat, many say 3M possesses. The innovation level within 3M is simply incredible and has been a constant since its founding over 100 years ago.

We start by examining the company's management. After all, a management team is a key factor in leading a company to achieve its strategic goals, and that's what sets the best of the rest in an industry.

Image source: 3M Corporate Officers [19659053] New CEO Mike Roman, who took over the previous CEO, Inge Thulin in July 2018, seems to be rounded off and should be able to continue building on the success that Inge Thulin provided 3M during their service period.

We just have to consider the fact that Mr. Roman has spent 30 years with 3M, and serves himself in a number of roles through all segments of the company. Mr. Roman served as COO and was previously responsible for international operations for all five of the 3M segments.

Mr. Roman will continue to lead 3M down the road to maintaining its strong commitment to R&D, which is important given that a third of 3M's sales come from products invented over the past 5 years.

Image source: 2018 3M Investor Day Presentation

As indicated by Mike Roman in the last earnings call, 3M is dedicated to increase its R&D from the historical average of 5.5% of sales to 6%. Although the company failed to reach that goal in the fourth quarter of 2018, Mike Roman 3M's commitment to reaching the 6% goal was rated.

We are committed to running that model, the 6% R&D and investment in capex that comes with it. If you look at 2018, we have actually increased the number of employees, so there is a better reflection perhaps about our commitment to the ongoing investment. CEO Mike Roman

Image Source: 2018 3M Investor Day Presentation

This commitment to continued innovation is expected to serve the company well and lead to strong results in the years to come. Earnings per share growth are expected to reach around 8-11% over the next 5 years. We analyze below how the company expects to achieve this growth in the coming years.

Image source: 3M Q4 2018 Income inventory

With efforts to expand R&D in technology platforms, such as air filtration, healthcare and renewable energy which is expected to achieve strong growth in 2019 to 2023, 3M expects growth in growth in turnover of 3-5% to increase during that time.

The company is also known for its Lean Six Sigma approach to managing its operations divisions and is not afraid to sell outperforming assets to bring returns to acceptable levels.

3M is in the recent phases of the plan to close the production plants and move productions to their facilities which have been improved through automation. This measure is estimated to be a $ 500- $ 500 million cost-saving program and serves as another example of the company's commitment to practical margin expansion without harming its underlying business and risking its reputation in the process.

As such, this is expected to drive 2-3% margin expansion and contribute to 8-11% wage growth.

Image Source: 2018 3M Investor Day Presentation

Another component that is expected to contribute 1-3% to earnings growth is through management's conservative, bolt-on acquisitions to increase revenue.

While industry users often focus on billions of dollar deals that are sometimes overpriced, 3M has taken the approach to engage in occasional deals that it believes will add value to an existing business line.

As 3M recently demonstrated with its $ 1 billion M * model procurement, the company is focused on strengthening its existing health information information unit, and while small (<1% of 3M's total sales), 3M pays a reasonable 10 times EBITDA for a company that generates $ 200 million in annual sales.

Image Source: 3M Q4 2018 Inventory of income

In addition to the growth plans laid out above, 3M is also known for weather Conservative in the use of debt. The company has an AA credit rating and a stable perspective. While management expects to invest in growth projects and initiate stock buy-backs over the next 3 years, the $ 5 billion increase in investment planned during that time is unlikely to increase any quarterly 3M net debt burden problems from $ 10 billion to $ 15 billion, in case 3M comes close to delivering the results they have projected.

Risk to Consider

Now that we have discussed that the attractive dividend profile and growth prospects of 3M, I would like to make it clear that, even as the bluest of blue chips, 3M does not come without its risk. As with any equity investment, there is a risk that investors need to consider before investing their hard earned money in a company.

I want to show interested readers on pages 10-12 in their latest 10-K form a very comprehensive and thorough list of the various risks facing 3M.

As we were reminded of the $ 850 million settlement with the Minnesota lawyer in February 2018, due to allegations of a former Scotchgard ingredient that entered the state's drinking water, it is important to remember that litigation can be a significant cost to a company like 3M. The legal settlement led to a $ 1.28 lower income than they would otherwise have been in 2018.

While another litigation of this size would not be detrimental to a 3M company, there is still a setback and risk for that the need to be regarded as going forward.

Another risk that is particularly relevant to an industrial company such as 3M is the risk that trade war and economic downturns will cause problems for 3M in the short to medium term. While 3M has experienced many recession times, it will undoubtedly lead to earnings that have been reduced for a short period.

It is the revenue that is slightly reduced and a compressed number that will lead to a stock price that will suffer in the midst of a recession. For example, the share price of 3M was around $ 94 per share in July 2007 and crashed to around $ 50 per share in the Great Recession's climax to early 2009.

This kind of volatility from one business cycle to the next makes 3M a company it is just worth keeping from the economic cycle to the economic cycle. If one is unable to handle this type of volatility and potentially downward pressure, they will be best to avoid stocks altogether and especially a cyclical company such as 3M.

Along these lines, it is also important to remember that only 3M generates 39% of their sales in the United States. The other 61% are derived from international sales. Currency fluctuations are another macro risk against a global company such as 3M and have the ability to be disruptive or beneficial to a business. But in the long run, currency fluctuations tend to level out.

While the risk to 3M is typical of an industrial company, 3M's exceptional culture has made it possible to hedge these risks and increase yields for longer than most people have lived and pay for an uninterrupted dividend of over 100 years.

I do not see that this time is different, and I believe that 3M will continue to address these risks in the future.

Reason # 3: An Excellent Company To Trade At Real Value

As important as finding an excellent company in terms of basics, it is undoubtedly as important to buy at a price that is close to real value. In the case of 3M, the company trades roughly in the middle of 52 weeks average, so while this is not a company trading at a steep discount to today's price of $ 208.08 per share (as of March 15, 2019) I think 3M is trading to fair value. We will dive into more details, why I think this is the case below.

I use a number of methods for valuing stocks, to estimate an estimated average fair value. It is based on this average fair value that I can forecast total returns over the next 5 years for a stock.

The first method I should investigate is the forward price to the earnings ratio or the forward PE ratio. A PE ratio below 5 years average may indicate that 1) a company's fundamentals have worsened and guarantees a lower valuation several (as basic 3M indications, this does not seem to be the case), or 2) The company trades at a discount to fair value or fair value, and provides an attractive purchase opportunity.

The forward PE ratio of 3M is currently 19.34 compared to the 5 year average of 19.53 per Morningstar, for 1% discount to fair value. This means that 3M is valued at $ 210.12 per share and offers 1% upwards in several expansion over the next few years.

Another valuation method I use to determine the fair value of dividend growth stocks is to compare the current dividend dividend to the 5 year average of the stock.

Currently, 3M offers a dividend of 2.77% against a 5-year average of 2.53%, per. Simply Safe Dividends. The EPS dividend ratio has remained stable over the past 5 years, so this increased return is not due to an increasing EPS payout ratio. The main factor for this increased dividend is that the 30-year tax now gives 3.01% (as of March 15, 2019). Due to the 3% risk-free interest rate, investors require an increased dividend dividend to take on the risk that comes with an equity investment such as 3M.

Although we assume the fair value dividend of 3M is 2.75% ahead over the next 5 years, it would mean 0.7% up from this point in the valuation expansion.

This in turn would mean a fair value return of around $ 210 per share, meaning that 3M trades at 0.9% off at fair value while giving up 0.9%.

A final valuation method that I use to determine fair value is via the dividend model or DDM.

Image Source: Investopedia

The first variable of expected dividend per share is also the simplest and can be found in seconds. 3M's current annual dividend per share is $ 5.76.

The next variable of capital capital is another term for that yield requirement. This variable can vary widely from investor to investor, but for this discussion I use 10% as it is slightly above average for stocks over the last few decades.

The final variable of dividend growth is the most difficult input in this feature, but I predict this variable as well as I can build on both what the company has proven it is capable of in the past and based on the growth estimates in the years to come. .

I see a 7.25% long-term dividend growth should be realistic when we consider that 3M is expected by analysts to maintain the status quo and increase earnings with high single digits in the years ahead. As the company continues to grow, we expect a moderate decline from the dividend growth of 16% 5 years and a slight deceleration from the growth rate of 8% 20 years.

Due to this information, the real value of 3M using DDM is $ 209.45 per share. This implies a 0.7% discount to fair value and offers 0.7% upside.

On average, these three fair values ​​together come at a fair value of $ 209.86 per share. This means that 3M shares trade at a 0.8% discount to fair value, giving up 0.9%.



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