I did analyse and value 3M and if I have to summarize everything into one sentence, it would be the following: 3M is a fairly-priced resilient dividend company and it can serve as a good example that the market is not always rational.
For those that would like to read more, below is my analysis:
Introduction of a boring company
3M is a mature company that grew revenue by 2.8% annually in the last 5 years with a stable operating margin of around 21%. On top of that, its CAPEX is almost equal to depreciation + amortization. This basically means it is reinvestment just enough to keep doing what it has been doing and we can expect similar performance in the coming years. However, just because it's a boring company, doesn't mean it is a bad one nor a bad investment today.
What about Covid?
Looking into the revenue, it dropped less than 2% in 2019, which shows how resilient it is to events like the pandemic.
So what makes it interesting?
It has been paying dividends for over 100 years and has 64 years with a consecutive dividend increase. With the current market price of $150.51, the dividend yield is close to 4%. The 2017 annual dividend was $4.7 and increased to $5.92 in 2021.
On top of that, they're buying back shares. How much? Well, the outstanding shares decreased from 613m in 2017 to 571m.
Combining the dividend payouts + the share buybacks is very close to the net income. It is quite clear that everything that they make is being distributed back to the shareholders.
Yes, this makes the company more boring, but it depends on your risk appetite and investment philosophy. This could be a perfect fit for someone with a defensive dividend portfolio.
3M's poor buyback timing
I've mentioned that they've been buying back shares, but if we take a look at the timing, it's not great:
2017: $2.1b
2018: $4.9b
2019: $1.4b
2020: $0.4b
2021: $2.2b
If we take a look at the share price in the last 5 years, it is clear that it dropped around May 2019. Strangely, they were buying back fewer shares during those periods. Of course, nobody can expect when the dip happens, so I don't blame them for the buybacks in the years prior, however, when the dip was there (and still is), they could buy back more shares at a lower price. One of the reasons could be Covid-19, but I am sure that the management could assess the impact within a few quarters.
How much is the company worth?
I used two different approaches to value the company.
Model #1 – Dividend growth model
This is fairly simple to calculate as it takes only a few numbers, the dividend in the next year, the discount rate, and the dividend growth in perpetuity. Based on this approach, the price should be around $141/share (current share price $150.51).
Model #2 – Discounted cash flow
This one takes requires a few more assumptions that you can find below:
Revenue growth – 3% in the next year (as per analysts' estimates) and 2% for the years after that
Operating margin – 21% (same as in the past 5 years)
Discount rate – 7.22% (Based on WACC)
Value – $138/share
Of course, I used conservative assumptions and if they perform better, the fair value would increase.
However, it's worth noting that with both models, the fair value is not that far from the current share price.
What did I mean when I mentioned the market is irrational?
The market gives a premium to companies with long periods of dividend payments and 3M definitely fits in this category. So, we have a mature company that is growing at a very low pace, maintaining profitability, and using all of its cash to pay dividends and buy back shares. On top of that, it proved resilient to events such as Covid. All of this points out to a company that has low risk and one should expect low volatility.
Yet, the price went from $192, 5 years ago, to $250 and now is down to $150. This volatility is not justified by the company's fundamentals as nothing significant happened.
Would 3M beat the market?
In my personal opinion, 3M could beat the market in the short term. However, it is not the type of company that could deliver 15% returns year over year in the next decade. The low-risk companies should deliver lower returns, but that's not always bad. As mentioned above, this could be a great fit for someone who's into dividend investing and is happy with a guaranteed 4% yield/year that grows over time.
I'd love to hear your thoughts and feedback. I'm trying to improve not only my skills in analysis and valuation but also the way I structure the story as a Reddit post.
Feel free to challenge every single word that I've written as it will only add value to me and to the rest who read this post.
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