Stock valuation 3M

The following analysis is about one of my favorite companies and a dividend paying machine. Unfortunately I do not have any stock of 3m as currently it is very high priced and I did miss a good entry point 1 year ago.

3M Co is a diversified technology company. The Company’s business segments are Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. Its products include vinyl, polyester, and foil. It was founded in 1929, and is based in St. Paul, MN. The company is a dividend aristocrat and has increased its dividend since 58 years.

Valuation

Currently 3M is priced  at 176.82 USD per share.

3m

If I take the average of the 4 ratios according to the 5  year average the price would be at 146.2 USD. That means the current price is 21.0% above its 5 year average. The 5 year high was at 181.11 USD about 6 months ago, so currently the stock just trades 2.4 % below its 5-year high.

Earnings per share growth

In 2011 the EPS were 5.94 USD and expected EPS in 2016 will be around 8.16 USD. This means EPS grew on average by 6.6%. What is even more convincing since 5 years there was never a drop in the earning per share. For the upcoming 5 years there is growth of 5.6% expected.

Dividend History and Future

3M has a strong dividend history with increasing the dividend for 58 years in a row. In the last 5 years, the average growth per year is 14.7% based on a dividend of 2.20 USD in 2011 and a current full year one of 4.36 USD. The payout ratio with 53.4% will be still on reasonable level. Never the less it is the second time that the payout ratio will be above 50% in the last 10 years.

An important point for my buying decision is as well the dividend yield on cost, which is currently at 2.51% based on the new quarterly dividend of 1.11 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming a dividend growth of 10% per year the dividend in 2020 will be at 5.91 USD, which means a yield on costs of 3.34% before tax. Surely this is not enough and also a sign that the stock is currently overpriced. Doing the same calculation with the average price of 146.2 USD, the current YOC would be at 3.04 % and with a dividend of 5.91 USD the YOC would be at 4.04%.

Conclusion

In general 3M is probably one of the strongest companies and should be definitely one of the core holdings in a dividend portfolio. The free cash flow per share is increasing on an annual base and gives enough room for further dividend increases. But currently 3M is overpriced and I will not consider it as an investment in the near future. As a good entry point I see a price between 145 – 150 USD.

What do you think about 3M? Do you already have it in your portfolio or would buy it at its current price?

Disclosure: I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

4 Comments

  1. 3M is a company that you can buy anytime in my book, its part of my CORE holdings, but there are definitely other stocks that are more attractive at this point which is much easier to put some dollars in it and not feel as bad because it was overpaid on this crazy market.

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