DGI Adventure – 10-05-2015 Limit Order Placed – 3M (MMM) – $133/share

Dividend Cycle

MMM will likely go ex-dividend a little bit before
Thanksgiving, and the Q4 dividend should be paid sometime in mid-early December.
The dividend, like the first three quarters of this year, is expected to be
$1.025/share. Historically (past 10 years or so) MMM raises the dividend for
the 1st Quarter dividend payment. They are a dividend super
champion, having raised the dividend 57 consecutive years. (Note: super champion
is not actually a classification in Mr. Fish’s spreadsheet…but holy shit…57
years!)

Investment

Technically this is my wife’s investment as she still has
unallocated capital in her Roth IRA. I’m proposing for her to put in a limit
order for 11 shares @ $133.00/share for a total investment of $1,469.95 ($6.95
trade commission).

The QC (Quantitative
Case)

Payout Ratio

53.5%

10 Year Revenue CAGR

5.03%

10 year EPS CAGR

8.18%

5 year ave P/E – Current P/E (ttm)

-2.29

5 year ave Yield – Current Yield

-.50%

15 year mean DGR (dividend growth rate)

8.00%

Debt/Market Cap

$8.52B/$91.41B

Total cash

$3.48B

Return on Assets

13.64%

Return on Equity

32.24%

Profit margin

16.01%

EBITDA / Revenue

$8.52/31.12 (27%)

Reverse DDM Fair Value DGR at buy price

6.92%

Assumed DGR (DDM valuation 10% disc.)

7.50%

DGR margin of safety

0.58%

Dividend Cushion Ratio

1.82

Cash from Ops “cushion”

-32.1%

Capex “cushion”

+353%

DGR “cushion” (delta)

20.5%

LOL (Limit Order
Logic) – $133.00

You may remember October of last year was kind of crazy. The
fed had just stopped printing money, and people were a little itchy. Sound
familiar? Well MMM bottomed on Oct13 closing at $132.90. There was a big surge
in volume around that time, and it looks like about as good a support level as
anything else. It also happens to represent almost exactly a 10% decline from
current pricing (MMM closed today at $146.31), and it just pushes the yield
over 3%. 10% is a pretty steep decline but we have a month and a half and an
upcoming FOMC meeting so who knows what could happen?  The P/E is a little on the high side. At the
proposed purchase price the P/E is 17.4 which is more in line with the 5 year
average of 16.8. A $133.00/share price would reflect a Forward P/E of 15.36 as
opposed to the current forward P/E of 16.9. All the other metrics are strong
enough for me to feel comfortable not worrying too much about P/E. But current
market price in the mid $140s is a little too spendy albeit below my estimated
fair value by a good bit.

QWaF (Qualitative
Warm and Fuzzy)

3M was founded in 1902. The last time they didn’t pay a
dividend was during WWI. The last time they didn’t raise their dividend Dwight
Eisenhower was president. They’ve been through a few cycles.

Past performance is great, but it only speaks to the
company’s “mettle”. I also need to feel good about the future. And I do.

3M is so diversified it’s hard to see any one macroeconomic
issue causing that big of an issue. They sell all kinds of stuff, and it’s not
all tape and glue, although consumables represent about half of their revenues.
The other half is high-end equipment and component parts. They operate in over
a hundred different countries. They have over $1.4B of “intangible” assets
listed on their balance sheet with an average “life” of 5-20 years. This is
thanks to healthy R&D spending – about 5-6% of revenue over the last 10
years. When you make $30B in revenue…that’s a lot of R&D. That means more
patents are in the pipeline. 3M’s strong brand name and economies of scale explain
the great return on capital, so there’s no reason those intangibles shouldn’t translate
into continued growth.

CPR (Cold and Prickly
Risks)

Operating in over 100 countries means you have to operate in
some pretty shitty countries. All the big multi-nationals are fighting currency
headwinds right now and that has as much to do with the high P/E as anything
market related. It’s hard to “move” the needle with companies this big.
Emerging markets represent the best opportunity to find that kind of growth,
but emerging markets kind of suck right now because the dollar is so strong.
Aside from the currency issues, a big question mark is hanging over the
prospect of global growth in the near future. So there is a chance that there
will be reduced demand for those high-end tech components of fancy pants
equipment. Fortunately 3M’s strong patent protection protects recurring revenue
in those markets, and the brand recognition should mean that whatever glue
people are buying is probably going to be made by 3M.

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