Since Halloween, 3M (MMM) has tacked on about 35% vs. the 21% gains for the S&P 500 Index in the same period … but why?
Sure, MMM has a dominant position in the chemicals and materials space. With its $80 billion market cap, $5.3 billion in operating cash flow and dividends dating back to 1916, this company is a case study in stability.
But revenue has been basically flat since fiscal 2011, tracking a measly 3.5% growth rate in fiscal 2013 and just 5% sales growth in fiscal 2014. Earnings are moving higher on efficiencies, yes, but the valuation is hardly cheap and improving earnings are baked in. Based on 2014 EPS forecasts of $7.35 per share, you’re paying a forward P/E north of 16.
That seems rich for a sleepy chemicals stock. And considering its dividend is just 2.1% at these levels — less than the 10-year T-Note is yielding after a recent run — there might not be much buying pressure from income investors going forward considering the alternatives.
3M isn’t going anywhere, but I think underperformance is in store for this pick after the run-up and modest outlook.