Is 3M Co a Good Buy For Income Investors?

3M Co.  has increased its dividend for 59 years in a row and is one of the most highly regarded stocks in the industrial sector. That said, any investment analysis of a stock's value must be forward-thinking, as well as mindful of the company's history. The key question is whether 3M can be relied upon to deliver for income investors in the future or not. Let's take a look at what it means to invest in 3M stock.

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3M Company 2017 Outlook

Now that the dust has settled on 3M Company's 2017 outlook meeting, it's time to take a deeper dive into what management outlined and what it means for investors. Here's a look at five key conclusions from the presentation and how they relate to the investment case for buying the stock.


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3M Company Stock Buy Backs: A Good Thing?

At the time of its second-quarter results, 3M Company announced that the company had made $2.1 billion worth of share repurchases in the first half of 2016, with a total of $4 billion to $6 billion planned for the full year. In addition, at 3M Company's investor-day presentation in March management announced plans to boost EPS by making stock buybacks in the 2016-2020 period. Frankly, I don't think this is a positive development for the stock, and here's why.

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Is 3M Company Stock a Buy?

On Tuesday, 3M Company (NYSE: MMM) reaffirmed its 2016 outlook and gave investors its five-year outlook. Following this announcement, the big question investors need to ask is this: How exactly are these companies supposed to generate strong earnings growth in a moderate economic environment? It's a particularly pertinent question, because 3M Company's new guidance calls for 8% to 11% annualized EPS growth from 2016 through 2020. Let's take a look at the company's new guidance and whether it makes the stock worth buying or not.

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Illionis Tool Works or 3M Company Stock for 2016?

Illinois Tool Works  and 3M Company both delivered solid fourth-quarter earnings recently, and maintained their full-year guidance for 2016. Given the deterioration in the economy in the fourth-quarter that's no mean feat.  As a consequence both stocks are now outperforming the S&P 500 and the industrials sector -- measured in this case by the IShares US Industrials ETF. Does this make the stocks a buy?

MMM data by YCharts

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Is 3M Company a Stock to Buy in 2016?

3M Company's (NYSE:MMM) outlook meeting on Dec. 15 disappointed investors, with management cutting guidance for 2015. Guidance for 2016 looks OK, but a combination of interpreting management's commentary on end market trends and looking at the data suggests 3M could struggle to meet its expectations.
With this in mind, let's take a look at five key takeaways from the meeting.

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Is 3M Company a Stock to Buy?

Quality stocks rarely come cheap, and 3M Company is a prime example. The company trades with a P/E in excess of 20 times and has recently cut its full-year 2015 guidance in the face of a weakening industrial economy. However, its underlying performance remains excellent, and management recently announced restructuring and productivity improvement programs designed to increase profitability in the next few years. Let's take a look at the pros and cons of buying 3M stock.

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3m Company Equity Analysis

3M Company (NYSE:MMM) is an exceptionally well-run business, but is it a great stock for your portfolio? It has industry-leading margins and productivity, but also a valuation to match. What it boils down to is whether you think the company can sustain the excellence of its execution. Let's take a closer look.


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Return on Assets Analysis of 3M Company (MMM)

When making an analysis of an industrial conglomerate such as 3M Company  (NYSE: MMM  ) , many investors settle on comparing segmental operating margins. However, a deeper analysis would also involve looking at segmental return on assets, or ROA -- defined here as segmental income divided by assets. This is a useful measure that helps investors to understand how the company makes best use of its assets and where it should invest for growth. Let's see how this applies to 3M.


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Why 3M Company Has Underperformed

It's been a frustrating year for shareholders in 3M Company (NYSE: MMM  ) . The company hasn't really done anything wrong, yet the stock has underperformed the S&P 500 by more than 7% this year, as of this writing. The relative weakness is somewhat surprising for such a highly regarded company. Why has the company underperformed, and what can it do about it from here on?

Source: 3M Company.

Global growth weakening; North America fine
As always in investing, there's no clear picture; however, there are three related reasons that 3M is underperforming. First, the diversified industrial sector has been weak in the market this year. A quick look at 3M's share price performance alongside peers Dover Corp. (NYSE: DOV  ) , Illinois Tool Works (NYSE: ITW  ) , and Danaher (NYSE: DHR  )  shows that the whole sector has found it tough going this year.


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Is 3M Company a Buy?

It's no secret that 3M Company  is a very well run company, but is it a great investment right now? Aside from some weaker conditions in Latin America, 3M Company delivered on almost every front in the quarter. Moreover, the commentary around the results made for good news for the industrial sector, and specifically, for Pall Corporation  . Were the earnings good enough to suggest that 3M Company can go higher in 2014?



3M Company's quality of earnings doesn't come cheap
On an absolute and relative basis, 3M Company doesn't look like a particularly cheap stock. A quick look at its valuation versus a collection of its industrial peers indicates that the stock has a lot of good news already priced in.

ITW EV to Free Cash Flow (TTM) data by YCharts

On the other hand, good news comes from well run companies, and 3M Company's latest results were very solid. A few highlights include:


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3M Company Earnings Analysis

It's no secret that 3M Co.   is one of the best run companies in North America, and it's also no secret that the company's stock valuation of 20 times current earnings is hardly cheap. The company is best understood as a play on global industrial growth, and in this sense it's useful to compare it to other industrial stalwarts, such as Illinois Tool Works    and Emerson Electric. With this in mind, investors need to ask themselves what 3M needs to do to make it a good value.

3M's relative valueThe graph below offers a look at its valuation compared to Emerson Electric and Illinois Tool Works using enterprise value (market cap plus debt), or EV, over free cash flow:

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Pall Corp Earnings Research

Filtration and separation company Pall Corporation is not often discussed by the investment community, but that doesn't mean that Fools should ignore it. On the contrary, it's one of the most interesting stocks in the industrial sector, as its outlook usually contains a useful read across many industries. In addition, it competes with the units of some giant conglomerates, such as General Electric and 3M Company, as well as smaller companies like Donaldson Company, Inc.   and Entegris, Inc.  , so its commentary is relevant to them as well.

Pall Corporation's recent second-quarter results
The company's sales were evenly split between life sciences and industrial segments in 2013. The two segments provide Pall Corporation with a nice mix of health care stability and cyclical industrial growth, while its razor-and-blade model means that it can generate long-term sales from consumables (87% of its sales in 2013) provided it expands its installed systems sales.

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Illinois Tool Works Equity Research

Illinois Tool Works is always one of the most interesting industrial companies to follow because it has broad exposure to the industrial economy. In particular, Foolish investors in peers like Johnson Controls Inc.  and 3M Company should take note, while Fools invested in industrial supply companies like WESCO International Inc.  and Fastenal Company will surely have an interest, too.

How Illinois Tool Works makes money
A quick look at Illinois Tool Works' revenue by end market reveals how diverse its end-market customers are. Even within the automotive segment, it sells into a mix of original equipment manufacturers and aftermarket customers. It's a similar story within its construction (residential, commercial, and renovation) and its food (institutional, service, and retail) sales, too.

 

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