LIKE WARREN BUFFETT, BUY GREAT COMPANIES WHEN THEY GO ON SALE!
This month’s stock pick is a company whose products I’m sure you’ve used. Their consumer products are well-stocked at Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and Target (NYSE:TGT). The company is 3M (NYSE:MMM) and known for inventing post-it notes. Some of 3M’s other well-known brands include Scotch tape, Filtrete, and Command.
3M is considered an industrial conglomerate. Its operations are split into five business segments: Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer.
One thing I learned from the teachings of Warren Buffett is to try and buy great companies when they go on sale. When a company’s been around since 1902, is a member of the Dow Jones Industrial Average (DJIA), and managed to steadily grow its sales and earnings for several decades, I consider it a great company.
2 REASONS WHY I CONSIDER 3M STOCK TO BE ON SALE
The first reason I consider 3M’s stock to be on sale is that it is a member of the Dogs of the Dow. The Dogs of the Dow are the 10 highest paying dividend stocks in the DJIA. They are considered out of favor stocks that potentially could be undervalued. As of Friday’s close, 3M was the 7th highest paying dividend stock of the DJIA, yielding 3.36%.
The second reason I believe 3M to be on sale is its stock chart. The stock price is 35.8% below it’s high set in January 2018 and it’s selling for less than its 200-week moving average.
3M Stock Chart
Fed Rate Cuts Could Be A Short-Term Catalyst
Although market timing is not as important for long-term investors with 10+ year time horizons, it’s always nice to buy a stock right before it starts to rise. Investors look for catalysts that could propel a stock higher.
A very strong catalyst that could lift 3M is the Fed rate cuts that started earlier this year. So far, the Fed cut rates twice this year. You may have noticed that your high-yield savings rate recently fell below 2% – OUCH! This pain is not only felt by retail investors like us, but also by hedge funds and other big fund managers. In this falling interest rate environment, one of the best places for fund managers to rotate money into is the DJIA stalwarts like 3M that pay over a 3% dividend yield.
Is 3M’s Dividend Safe?
3M is a member of the dividend aristocrats, stocks that have raised their dividends for at least 25 years in a row. 2019 marks the 61st year that 3M has raised its dividend. According to the most recent 10-K report, the dividend payout ratio with respect to free cash flow was 65.7%. So 3M’s dividend appears to be safe.
I’m betting that 3M’s dividend will lure fund managers to pour money into its stock. This could be the catalyst that lifts its stock higher.
3M’s debt-to-equity ratio seems high at 284.2%. Borrowing money has become cheap the last 20 years with the Feds lowering interest rates to historically low levels, so I can see the logic of holding more debt.
For example, Berkshire Hathaway (NYSE:BRK.A, BRK.B) has increased its debt-to-equity by 86.2% since 2005. But during the same timeframe, 3M increased theirs by 171.9%.
Different industries and businesses can efficiently take on different levels of debt, and admittedly this is not my area of expertise. However, I found this article that does a pretty good job of answering the question of whether or not 3M has too much debt.
In general, I like seeing companies that decrease their debt loads, so this is something I’m going to keep an eye on.
Another area of risk is a prolonged stretch of decreased revenues and earnings. I expect a company like 3M, which survived and thrived past the Great Recession (2007-2009), to come back strong after a year or two of decreased earnings growth. The Q2 earnings showed a big decline. If history repeats, earnings will bounce back in a few years. If it doesn’t, I’ll consider selling.
Stats (as of 8/23/2019)
- Market Cap: $95.9B
- Closing Price: $166.76
- Revenue Q2: $8.171B
- Revenue Growth (Q2 yoy): -2.6%
- Net Income Q2: $1.127B
- Net Income Growth (Q2 yoy): -39.3%
- EPS: $1.95
- EPS Growth: -37.9%
- Debt/Equity: 284.2%
Should I Buy?
3M Company could be a good addition to a portfolio that needs exposure to:
- The Industrials Sector
- DJIA stocks
- Large Cap stocks
Be sure to do your own research and determine for yourself if 3M Company is a good stock for your portfolio.
The Bottom Line
3M Company is large-cap industrial conglomerate and a component of the DJIA. It’s Dogs of the Dow status may be an indicator that it is currently undervalued.
I/we own shares of stock in MMM and AMZN.
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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