Dividend Aristocrats Part 48: 3M Co (MMM)

3M’s Competitive Advantage

3M’s competitive advantage can be broken down into 4 distinct components: technology, manufacturing, global capabilities, and brand.

Source: 3M 2016 Outlook Presentation, slide 8

All of these strengths are supported by 3M’s culture of innovation. Google (GOOG) used to give its employees ‘20% time’ – they could spend 20% of their time on special projects. Google discussed this policy during its 2004 IPO. It has largely already faded away, just 12 years later.

Contrast this to 3M. 3M has given its employees a similar ‘15% time’… Since 1948. 15% time is still going strong at 3M nearly 70 years later.

3M has been ramping up its research and development spending in recent years. The company is planning to spend 5.8% of sales – $1.8 billion – on research and development in fiscal 2015 (and again, in fiscal 2016).

Source: 3M 2016 Outlook Presentation, slide 25

Ted Fischer summed up 3M’s competitive advantage well in a recent article on Seeking Alpha:

“(3M) is not merely a manufacturing company, it is a technology company. It is defined by continual innovation, by superior manufacturing competency that competitors struggle to duplicate, and by a consistent commitment to quality.”

At its core, 3M’s competitive advantage is culture based; the company’s advantage comes from its focus (and large spending) on innovation. The company’s other strengths flow from its innovation-centered culture.

3M’s Total Return Prospects

3M’s long-term growth goal is to generate 9% to 11% annualized earnings-per-share growth.

The company is expecting earnings-per-share growth of 7% to 12% in fiscal 2016 – in a challenging environment. Earnings-per-share are expected to grow just 0.8% in fiscal 2015 due to negative currency effects and a global growth slow down.

Of course, 1 year is not a fair time frame to judge growth. 3M has compounded earnings-per-share at just 4.5% a year over the last decade.

It doesn’t take a mathematical genius to realize that 4.5% annualized growth over the last decade is nowhere close to management’s projected 9% to 11% long-term earnings-per-share growth rate.

I believe a fair earnings-per-share estimate for 3M over the next decade is 7% to 11% per year. How the company will hit this growth is discussed below.

First, 3M is shoveling money to shareholders through share repurchases. The company has reduced its share count by 3% a year since 2010.