Historically, 3M Co (NYSE:MMM) has invented some of the globe’s best products. Its innovative culture, bottom-line focus, and low-cost manufacturing enable it to generate rewards over the long run. 3M has posted attractive growth in its sales and profits in the last few years, driven by the growth in developing markets and its innovation, which constituted 34% of its sales in 2012.
In this piece, I look at 3M Co (NYSE:MMM)’s financial situation and its growth in emerging markets. I will also look at its ability to sustain returns for shareholders.
Dividend and growth
3M Co (NYSE:MMM) is considered a safe bet for income oriented investors, as it has a long, 97-year history of dividend payments. At the moment, 3M is offering a dividend of $0.635 per share, yielding 2.18%. In the latest quarter alone, it paid $436 million in dividends and repurchased $1.2 billion of its own shares.
Its strong growth in share price has brought the yield down over the past few years. In the last year alone, its share price increased by 28.96% while the dividend increase is at 7.63%. At present, its stock is trading at 18.4 times earnings and 4.4 times book value when the industry average is at 18.4 times earnings and 2.8 times book value, which looks pricey to me.
Financial situation
3M Co (NYSE:MMM) is a global technology company. Its businesses segments include Industrial, Health Care, Consumer & Office, Safety & Graphics, and Electronics & Energy. Recently, the company announced second quarter results with record sales and earnings. Four of its five business segments achieved positive organic growth and posted operating margins above 21%.
At the end of the second quarter, its operating income stands at $1.7 billion while net income is at $1.2 billion. 3M Co (NYSE:MMM)’s cash conversion rate is high. It has been able to convert 107% of net income to free cash flow, which fueled continuing investment in the business and allowed it to return significant cash to shareholders.
This company has strong potential to generate cash. In the latest quarter, its free cash flow was $1.3 billion when dividend payments accounted for only $436 million. Its price to cash flow ratio is also very high at 15%, demonstrating its cash generating potential. Its payout ratio of 35% in the last 12 months offers it a lot of room to increase dividends. Overall, 3M has a strong cash position to sustain returns for investors.
Growth in emerging markets
3M has been showing a strong growth in emerging markets. Improved penetration in the healthcare and consumer sectors of the developing world, including Latin America/Canada and Asia-Pacific is generating double digit growth to sales and profits. Together, Asia Pacific and Latin America make up over 40% of 3M’s sales in the latest quarter.
Despite weakness in the international economy, these regions have continued to increase at fairly higher rates. These regions allowed it to increase sales at strong rates. Particularly, 3M has strong prospects to increase its healthcare and consumer sales as the standard of living and disposable incomes are increasing in the developing regions.
3M’s other business segments are also showing strong growth in developing countries. Over the last few years, manufacture spending and high infrastructure from the developing states is generating high demand for 3M’s products like industrial abrasives, highway reflective signage solutions, roofing granules, and other related products. On the whole, 3M is anticipating its sales from the emerging markets to grow by 5-10% annually in local currency terms.
Competition
3M’s main industry peers are General Electric Company (NYSE:GE) and United Technologies Corporation (NYSE:UTX). General Electric is one of the best companies working in this industry. It offers a healthy dividend with steady price appreciation. At present, General Electric offers a quarterly dividend of $0.19 per share, yielding 3.07%. General Electric has shown a solid financial position to sustain returns for investors.
Recently, it announced second quarter results with operating earnings of $3.7 billion and net earnings of $3.1 billion, a 3% increase over the past year’s quarter. Importantly, six of its seven industrial business segments have shown strong growth. It is working on a balanced capital allocation plan. It is reducing the overall size of the organization while focusing on its core business. On the whole, General Electric Company (NYSE:GE) is a safe company for dividend investors.
United Technologies Corporation (NYSE:UTX) offers high technology products and services to the aerospace industry and building systems worldwide. Its segments are UTC Aerospace Systems, Otis, Sikorsky, UTC Climate, Pratt & Whitney, and Controls & Security.
United Technologies offers a quarterly dividend of $0.535 per share, yielding 2.09%. Its dividend looks safe as the company has been showing a strong financial position and bright future prospects. Recently, it announced second quarter results with earnings per share growth of 5% to $1.70, and with a full year projection of $6 to $6.15, up 12%-15%. To do this, it is strongly working on restructuring, cost savings, and growing backlogs to increase the lower end of its earnings per share range.
In conclusion
3M is generating increasing sales from developing markets, and it has potential to more fully capture these markets. 3M is a solid company as its businesses are already well known in developing countries, and it has the ability to innovate in multiple sectors. 3M’s solid dividend, strong growth potential and excellent product diversification makes it a great pick.
siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends 3M. The Motley Fool owns shares of General Electric Company.
The article Prospects Look Bright for This Company originally appeared on Fool.com and is written by siraj sarwar.
siraj is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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