If you can invest in a company that has surreptitiously made its way into every corner of your life, I’d say that’s a great buy. 3M (NYSE: MMM) is one such company. With a hundred-year history behind it, it’s also the kind of investment you can jam into your portfolio and forget about.
Don’t believe me? Take a walk around your house and I’ll bet you find at least a few of the following products that have enriched MMM stock holders:
3M branded glue sticks, CD-ROMs, Post-It Notes, Scotch Cassette Deck Head Cleaner, Nexcare band aids, Scotch tape, Oxy Carpet Cleaner, O-Cel-O Sponge cloth, Scotch-Brite pads, Scotch micro-fiber cleaning cloth Scotchgard on the couch…you get the idea.
These are what we call consumer staples and the worldwide reach of 3M and its staples has, and always will, keep it profitable. I haven’t even discussed the products you probably don’t know about in health care, transportation, displays, communications, and industrial supplies. The breadth of its product offerings make 3M a leader in many fields.
Financially, the company remains a powerhouse, even during the recession. Analysts are looking for 8% earnings growth this year, 12.5% next year, and 12% annually over the next five. And this year’s growth is expected to come on top of 12% revenue growth. That’s astonishing, and shows the power of dealing in a sector of products that consumers constantly need to buy. Amazingly, it trades at almost the same P/E multiple of 15 that Johnson & Johnson (NYSE: JNJ) does, yet is growing faster.
But just because a company is venerable and growing earnings doesn’t tell the whole story. I always look to free cash flow and debt to make sure the company is generating those all-important greenbacks for shareholders. What’s this for MMM? $4 billion in free cash flow each of the past two years, $3 billion the year before, and $3.6 billion in the last 12 months.
The company also sits on $4.4 billion in cash and has $4.1 billion in long term debt. Debt service is a tiny $200 million per year. Think about how extraordinary this is. The company is literally rolling in billions of dollars of cash — much of it borrowed at a 5% blended rate — and then produces billions more each year. Incredible.
With such cheap debt, the company can just keep plowing that cash into new products, expansion, and anything else it wants. Kind of a bummer shareholders only see a 2.4% dividend, but they shouldn’t complain. The company has returned 45 times it’s initial price back in 1902.
This is solid company for the long haul. It should be a core holding in anyone’s portfolio. It may not be the sexy high-growth company that others are, but it will let you sleep very comfortably at night.
As of this writing, Lawrence Meyers did not own a position in any of the stocks named here.
