3M Company operates as a diversified technology company worldwide. It operates through four segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. 3M is a well-known blue-chip company.
Market Cap: $85b S&P rating: A+
Well, almost 90% of the stocks in the market are in the negative territory since the new year’s eve but for 3M there is insider news that may can help understand why is the price of 3M that beaten down. The keyword is PFAS chemicals.. extremely hard to chemically remove/get rid of. 3M uses a lot of these in their products and because of that, there is litigation risk.
Personally, I look at this Information as a good opportunity to buy more from 3M but there is also a good example of why I’m not that worried about 3M’s health. Johnson&Johnson(JNJ) is one of the biggest blue-chip healthcare companies in the world and they are still facing some lawsuits because of their famous baby powder/oil product.
They are facing it, maybe they take some heavy losses but still, they can generate a very good return for their shareholders. I see 3M in the same way. They are in temporary trouble which will be over soon.
Past performance
They have a very low P/E ratio of 13.9. The total annual return on my money (6.5%) wasn’t as good as the S&P500 but I received nearly double the amount in dividends. The current price is again under the orange line which is the „Margin of safety” line after two years.
Exactly where Covid-19 began. Before that, you could buy the stock in an undervalued situation back in 2012. A huge opportunity is this right now.
– Besides the price drop on the chart, 3M reported their first-quarter earnings and they beat earnings estimates by $600m.
Dividend situation
They have a record of 63 consecutive years of dividend-paying and increasing. The current dividend yield is 4.02%; which is much more than the 5-year average which is 3.24%. The payout ratio is 58% and it was always under 60% which is very healthy.
If you want to take your stake from 3M then it is a perfect time! Buy some shares before 16. May which is the Ex-dividend date and take your first check!
A silent killer can be the number of outstanding shares. If a company issues shares in big numbers then your investment will be worthless, but if they buy back shares every year then you made a good investment and the company is capable of generating good profit and revenue. They always bought back shares until 2021, and then surprisingly in 2021 they issued some. It isn’t the best news but they issued only by a small percentage.
Forecasting, future growth
The future does look good for investors. Based on 20 analysts the estimated future growth rate is 8% yearly. Analysts have a scorecard also which tells me that they are 85% right about the estimates of this particular company.
Debt
Debt isn’t a thing to worry about in this case. MMM has a net debt to equity ratio of 111% which isn’t as high as other companies in the industry. On the Long-term debt/Capital side, the ratio is only 47% which is more likable. And the debt is well covered by the operating cash flow.
Fair Value
I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.
(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $51 361 + $102 796 = $154 157
Equity Value per Share (USD) = Total value / Shares Outstanding = $154 157 / 569 = $270.9)
Undervalued by 45.3%. The current fair value is $270.9.
Risks and the overall takeaway
I own 3M and it has a 5% portion in my portfolio which I consider a big portion. Their dividends survived a lot of stock market crashes. 3M is a SWAN stock(Sleep Well At Night :)).
Yes, you can be afraid about these PFA litigations but if you are thinking long-term like I do then 3M is an absolute buy at this valuation.
Disclosure: I have holdings in this mentioned company but I have no plans to buy more from this stock within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with this particular company.