I’ve been a fan of 3M (NYSE:MMM) ever since I learned that it manufactures just about everything.
Here in my house alone, I have 3M glue sticks, CD-ROMs, Post-It Notes, Nexcare bandages, Scotch tape (and dispenser), OXY Carpet Cleaner, O-Cel-O Sponge cloth, Scotch-Brite pads and Scotch micro-fiber cleaning cloth Scotchgard.
3M also manufactures products that really smart people use to in multiple industries on a global basis. It tackles medical and surgical supplies, drug delivery systems and food safety products. Then there’s the niche (sarcasm) producing optical film solutions for LCD electronic displays, computer screen filters, reflective sheeting for transportation safety, commercial graphics sheeting and systems, and mobile interactive solutions. Perhaps you’ve used 3M’s personal or commercial protection products? How about packaging and interconnection devices and insulating materials?
Seriously. Next time you are out and about, keep your eyes open for the 3M logo. You’ll see it everywhere.
The company has entrenched itself in the global economy. Even if one segment staggers a bit — as display/graphics recently did with a 6.5% profit decline — the other segments can pick up the slack, as can other regions. For example, Latin America and Canada saw 11%-plus growth in the most recent quarter, yet Asia was nearly flat on sales basis. But the company operates so efficiently that its margins remain above 20% across every single segment.
But before I completely fall for this stalwart, investors need to understand that’s what it is: a stalwart — not a growth play.
Analysts see 10% earnings growth going out five years, but 3M has a stock repurchase plan in effect that will take out 10% of outstanding shares, lowering organic earnings growth to 9%. The company produces some $5.50 per share in free cash flow annually, or about $3.5 billion, so that justifies assigning a premium to it. When you add in the 2.6% yield (Note: The dividend has been in place for almost 100 years), you can maybe justify a 14x multiple. That gives us a fair value of $89, so the company is trading right about where it should.
I think you can do a lot worse than owning this wonderful company at this price. But it’s also worth examining another conglomerate, just to see if the pricing compares.
I think General Electric (NYSE:GE) is a core holding for any diversified portfolio. GE continues to grow at 13% annually with a 3.2% yield and a tiny buyback that doesn’t impact earnings too much. In fact, I’d rather GE just hand that buyback money to shareholders as a dividend.
Anyway, when you add in General Electric’s enormous free cash flow of $20 billion annually ($2 per share), you can justify an 18x multiple, also putting GE’s price at fair value.
The bottom line here is that I think you can, and should, own both of these powerhouses. They are not only great consumer staples plays, which make for defensive holdings in tough times, but benefit during manufacturing upswings. They also both pay a nice (but not overwhelming) dividend. With a 2.9% average, the dividends effectively provide an inflation hedge, giving you attractive risk-reward capital returns over the next several years.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.