Being one of the top manufacturers of products utilized in Safety and Industrial applications, Transportation and Electronics, as well as Health Care services, 3M’s (MMM) brand is (one of) the strongest amongst its industrial peers.
The company’s diversified portfolio contains thousands of products which 3M distributes via numerous channels, such as direct-to-consumer and through a myriad of e-commerce and traditional wholesalers. Its product portfolio comprises primarily general consumer products, including home improvement and stationery products, amongst others.
As a result of 3M’s strong brand loyalty and product reliability, the company’s dominance in the space has endured for nearly a century. Further, due to multiple of 3M’s products featuring a mission-critical nature, the company boasts a prolonged track record of robust top- and bottom-line strength.
Hence, 3M has had the luxury of rewarding its stockholders with increasing capital returns for over six decades. Particularly, 3M exhibits a 64-year long track record of successive annual dividend hikes – one of the longest dividend growth records in existence.
Shares of 3M have been carried away lower along with most industrials over the past several months (excluding defense behemoths which enjoy tailwinds amid the ongoing geopolitical turmoil). Specifically, the stock has lost more than one-third of its value over the past year.
Consequently, 3M’s yield has been propelled higher. It is currently hovering close to 4.65%, which income-driven investors are likely to ponder on, especially considering that 3M’s financials have remained rather concrete to this date. That said, excluding the stock’s income prospects, I view 3M’s overall growth prospects as somewhat uninspiring. Hence, I am neutral on the stock.
Healthy Profitability Despite Pressured Margins
3M’s Q1 results came in relatively strong, with the company accomplishing organic local-currency sales growth of 2%. Still, amid FX and M&A effects, quarterly sales came in at $8.3 billion, relatively flat year-over-year.
Specifically, Safety & Industrial revenues came in at $3 billion. While revenues grew 0.5% organically, they were offset by a 2.1% FX headwind. Still, it makes for a solid result considering last year’s numbers had been inflated by increased masking systems, abrasives, industrial adhesives, and tapes sales. The Transportation & Electronics division also recorded narrowly lower sales, which declined 2.3% compared to last year. However, the Healthcare & Consumer divisions offset these declines, as their sales rose 2.7% and 1.8%, respectively. Hence the rather flat top-line.
While industrial companies have been under pressure as a result of increasing costs all across the board, 3M managed to maintain healthy margins.
Specifically, the company recorded an operating income of $1.64 billion, implying an operating margin close to 18.5%. While this is a lower percentage than last year’s 22.4%, 3M’s has historically exhibited very strong pricing power. Thus, I expect margins to recover gradually over the medium-term.
As a result of stable sales and downsized margins, the bottom-line dipped notably, with adjusted earnings per share landing at $2.26 versus $2.77 in the comparable period last year. However, this doesn’t necessarily mean that 3M will end the year with negative earnings growth.
Along with its earnings release, 3M provided its guidance for Fiscal 2022, which pointed towards another year of relatively stable profits. Specifically, the company expected adjusted EPS to land between $10.75 and $11.25. At the midpoint ($11.00), it would imply EPS growth of 8.7% against last year’s adjusted EPS of $10.12.
However, in early June, 3M’s CEO warned of a $300 million hit related to Chinese lockdowns and the invasion of Ukraine, which resulted in a slowdown in overall sales. This could have an effect of around $0.30 per share. Even if we suppose a further compression in margins as a result of lower sales and assume a $0.50 drag in adjusted EPS, the company should still achieve adjusted EPS growth compared to last year. Considering how treacherous the ongoing environment is and the number of challenges 3M is facing, I would say that achieving bottom-line growth is rather impressive.
Wall Street’s Take
Turning to Wall Street, 3M has a Moderate Sell consensus rating, based on eight Holds and four Sells assigned in the past three months. At $146.82, the average 3M price target implies 14.06% upside potential.
Takeaway
3M is a legendary dividend-paying stock that should continue to meet the needs of conservative income-oriented investors relatively well. The 4.65% yield is rather enticing, and the fact that earnings are likely to grow this year despite the numerous challenges the company is experiencing is quite remarkable.
However, due to the company being quite mature, sales growth is unlikely to surpass the single-digit rates going forward, especially in the current trading environment. Thus, it’s fair to bet that dividend growth will most certainly not match inflation levels in the coming years. The latest increase of just 0.7% signals management’s expectations of relatively underwhelming earnings growth over the medium term as well. At this point, I believe that dividend hikes should occur at slim rates for the sake of 3M’s legendary dividend growth track to be maintained.
Accordingly, while the company exhibits strong qualities, including sound and recurring cash flows, investors should not anticipate outstanding total returns ahead.
