What Are 3M Co’s (MMM) Fundamental Strengths And Strategic Levers?

Dividend aristocrat 3M Co (NYSE:MMM) expects constant currency organic growth between 1% and 3% during FY 2017 and EPS expansion of 4% to 8%. In the company’s 2017 outlook conference, CEO Inge Thulin said that the company has been focused on efficient growth, which he says comes from gaining profitable market share, over the past five years, giving it a formidable position to capture attractive growth opportunities that the company comes across in 2017.

3M Co is a diversified technology company. The Company's business segments are Industrial (including abrasives products), Safety and Graphics, Health Care, Electronics and Energy, and Consumers.

The four fundamental strengths

Mr Thulin highlighted that being able to combine the 46-technology platforms owned by the company, which has a vertically integrated business model, for any outcome is one of the four fundamental strengths of 3M. The rest being its processes and trade secrets associated with vast manufacturing footprint, local connections across 70 countries through subsidiaries, and 3M brand positioning in terms of ethics, quality, and consistency.

The three strategic levers

3M provided an update on what it calls three strategic levers, which play a key part in executing its playbook for value creation. First one is portfolio management, 3M started this in 2012 and reduced 40 businesses to now 25, which involved divesting non-strategic businesses and investing in suitable growth opportunities, while reducing the bureaucratic layers to improve execution.

The second in the list is innovation. 3M has increased investments in research and development from 5.5% of sales during 2012 to nearly 6% now. The company has invested close to $8.5 billion in R&D over the past five years, developing technologies used by its individual businesses to create differentiated products.

The third pillar of the company’s three strategic levers strategy, which it claims has helped it to consistently create value for shareholders, is business transformation. 3M plans to save (pre-tax basis) between $500 million and $700 million annually through implementing best practices globally, and it targets to achieve nearly $500 million incremental working capital (current assets – current liabilities), primarily through supply chain optimization.

Financial picture

3M has a strong track record of dividend payments, currently an investment in the company would yield 2.53%. The company has an iron-clad balance sheet with earnings covering the interest by 31.5 multiple. In addition, it’s payout ratio of just 54% makes dividends appear even safer.

While the revenue growth outlook is hardly strong, in terms of capital returns, the company’s return on capital of 25% and return on equity of 40.7% over the past year are way above the broader industry average. The stock is up nearly 19% for the year and appears fairly to slightly over priced through most valuation metrics.