This is the first article in an ongoing series, “Should You Buy the Dow,” in which I examine if a given Dow Jones Industrial Average component is a buy, sell, hold or short for your retirement account. Today, we lift off with 3M Co (NYSE:MMM), and what kind of place MMM stock has in your portfolio.
MMM is a pretty astonishing company with a long history. Since 1902, 3M has developed an astonishing array of products extending across multiple sectors.
Yet of all Dow components, 3M probably has more of a presence in your own home than any other.
Look in your home and I’ll bet you have at least some of the following: Scotch-Brite scrubbing dish cloth, Ace bandages, Nexcare band-aids, Post-It Notes, Command bath hooks, Filtrete heater unit filters, Futuro braces, 3M double-sided tape, Scotch-Blue painter’s tape, Scotchguard, and any of about 2,330 other products that may be lying around.
This is one of the reasons for the success of MMM stock over the years: these are consumer products that fulfill so many needs and there will always be demand for them. That means regular revenue and cash flow.
This doesn’t even speak to the massive business and corporate products. The MMM Health Care division offers surgical and medical products, medicinal-delivery systems and safety products for food. The Graphics and Display division provides optical film for LCD displays; computer screen filters; sheeting for safety in transportation; commercial graphics systems; and interactive products for mobile.
MMM has an electronics unit as well as an industrial unit, along with communications, manufacturing, energy, design, construction, automotive, oil & gas, and transportation. The list goes on and on.
3M offers thousands upon thousands of products, to the point that it isn’t just consumer staples that it provides, but in many ways MMM offers commercial staples. 3M is truly everywhere, in every business, and that’s a very compelling argument as to why it should be a core holding.
Not only that, it is truly a global company. A visit to its homepage asks which country you are visiting from, and has almost every country represented because 3M’s products are available there.
Let’s look at valuation. Analysts have five-year annualized earnings growth at 9%. At a stock price of $181, on FY 2016 earnings of $8.21, MMM stock trades at a price-earnings multiple of 22, which is extremely expensive.
MMM has cash holdings of about $2 billion, and while debt is huge at $9.3 billion, the interest rate is only about 1.6%. TTM cash flow was $5 billion. MMM has something around twice the free cash flow needed to pay its 2.5% dividend.
Bottom Line on MMM Stock
3M is truly a classic company, with a great future ahead of it. However, it is dangerously expensive. Certainly, it deserves a premium off its base P/E ratio — 10% for its world-class brand name, 10% for its great free cash flow.
But add 2.5% to the 5-year annualized earnings estimate, we get 11.43%. Add in the premium and we get a total reasonable P/E of 14 — at best. Paying 22 times earnings, however, is way too dangerous.
I suggest selling MMM stock for retirement accounts.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
