3M’s Strategy To Achieve Growth Targets

3M (NYSE:MMM) targets annual growth of 4-6% in sales and 9-11% in earnings over the next five years. ^[1] In order to achieve these targets, 3M plans to: 1)  increase investment in research and development; 2) capitalize on opportunities that developing markets present for 3M’s business segments; and, 3) acquire companies that  help strengthen and enhance its technological capabilities.

See our complete analysis of 3M here

Increased Investment In R&D

3M has decided to increase its annual investment in R&D from 5.0-5.5% to 6% of total sales. ^[1] This will also help in sustaining base level organic growth of the company. 3M’s focus on R&D enables it to provide customers with new and innovative products that generate higher margins, since they are priced at premium rates. Meanwhile, older products have to be priced competitively due to the availability of cheaper alternatives. Since 3M generates a third of its revenues through products that have been developed in the past 5 years, ^[1] the company must continue to invest in R&D in order to churn out new products frequently and maintain the premium returns.

Developing Markets Shall Drive Future Sales And Growth

In 2012, developing markets contributed 39% to sales in 3M’s Industrial, Safety & Graphics, and Electronics businesses, and only 20% in the Consumer and Healthcare businesses. ^[1] This is because developing markets are more focused on infrastructural growth and manufacturing operations than consumer and healthcare goods. But as developing markets progress, their per capita income will increase, leading to increased spending in the Consumer and Healthcare segments, as the population achieves a higher standard of living. This will give significant upside opportunity to 3M in the Consumer and Healthcare segments.  3M offers medical tapes, cleansers, wound dressings, antiseptics, surgical clippers and oral care products in its Healthcare product portfolio; and in the Consumer segment it sells Post-it® products, adhesives and tapes for office use, and home cleaning, repair and improvement products.

Developing markets like Asia-Pacific and Latin America accounted for 34% of 3M’s total sales in 2012. It may further penetrate these markets by investing in localized manufacturing plants and research centers. 3M believes that developing markets can account for 40-45% of its total sales and and generate average annual growth rate of 8-12% over the next 4 years. ^[1]

Strategic Acquisitions Will Boost Inorganic Growth

Acquisitions form an important part of 3M’s growth strategy, since it complements 3M’s growth efforts of investment in R&D and developing markets. It has been involved in acquisitions across various business segments to fill strategic gaps and enhance core and technological capabilities. ^[2] 3M’s last acquisition was Ceradyne Inc in 2012, a global leader in development and production of advanced technical ceramics. The company is a disciplined buyer and has yet to announce a deal this year; though its possesses the financing capacity for a deal, it apparently has yet to find a target.   3M allocates $1-$2 billion annually for acquisitions to boost inorganic sales growth. ^[1]

Shareholders To See Significant Returns

If 3M achieves its sales and earnings growth targets, it will likely return more cash to shareholders through higher dividends and share repurchases. It raised its quarterly dividends this year from 59 cents to 63.5 cents per share, an increase of 7.6%, making it the 55th consecutive increase in its dividends. 3M has already purchased $3.53 billion of stock this year and has increased the expected gross share repurchase for 2013, from $3.5-$4.5 billion to $4.5-$5 billion, citing good business growth and significant cash flow. ^[3] Approximately, $4.1 billion is still available under the new repurchase program authorized in February 2013. Looking at 3M’s history of regular dividend growth, and the increased share repurchase expectations for the year, shareholders can expect to see further increases in shareholder value, even if a down market offers headwinds to a higher share price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. 3M’s Morgan Stanley Industrials & Autos Conference Presentation, September 18 2013, www.3m.com [↩] [↩] [↩] [↩] [↩] [↩]
2. 3M’s 10K SEC Filing, February 14 2013, www.3m.com [↩]
3. 3M’s 2013 Q3 earnings transcript, October 24 2013,www.3m.com [↩]