Wide Geographic Presence, Diversified Product Portfolio Will Continue To Drive 3M’s Growth

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3M Company

3M (NYSE:MMM) has seen continued growth of late, beating market returns by a large margin. In the past 10 years, 3M’s stock has grown 95.5%, whereas the S&P 500 grew 74.6%. The primary reason behind 3M’s performance is its vast diversification, both in terms of geographies and products. Its vast presence allows it to capture growth in all economies and product segments. We believe that continued growth in the global economy and 3M’s focus on research and development (R&D) will continue to drive growth for the company. 3M’s shareholders are likely to benefit from this growth in the form of higher dividends and share repurchases.

See our complete analysis of 3M here

3M Grows With The Global Economy

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3M offers a wide variety of products that cater to almost every phase of a country’s economic evolution. [1] Its diversification makes it highly correlated with a given market’s economic growth. Additionally, due to its presence in a large number of geographies, growth in world output can be a good indicator of 3M’s growth prospects.

The global economy moved at a slower pace in the first half of 2014, as weak growth in the U.S., Japan, Russia, Latin America and China took a toll on overall global growth. The U.S suffered due to harsh weather conditions, Japan because of the high consumption tax, and Russia and Brazil due to a decline in investment. However, things are looking up in the second half. The International Monetary Fund (IMF), in its World Economic Outlook report released in October, forecasts 3.3% growth in global output in 2014 and 3.8% in 2015, compared to 3.3% in 2013. [2] 3M, with its global presence, will likely benefit from growth in the world output.

Investing In R&D Drives Product Growth And Pricing Power

As indicated by its New Product Vitality Index (NVPI), a third of 3M’s sales come from products that have been developed in the past five years. [3] It is able to regularly introduce new products by spending heavily on R&D. In 2013, 3M spent 3.6% of its revenues on R&D, up 0.1% from 2012. The company has decided to gradually increase its annual investment in R&D to 6.0% of total sales by 2017. This will help in sustaining organic growth for the company.

Because of the innovative and differentiated nature of its products (as well as established brands for many products) 3M commands considerable pricing power. It is able to charge premium rates for products that have been introduced recently, which helps in improving margins. Meanwhile, older products have to be priced competitively due to the availability of cheaper alternatives. As 3M continues to increase its R&D spending, it expects to see its NVPI increase to 37% by 2017. With a higher number of newer products accounting for sales, 3M’s pricing power and margins will likely continue to improve.

Shareholders To See Significant Returns

3M’s confidence in its growth can be seen from the capital it returns to shareholders. For 2014, it raised its quarterly dividends by 35%, to 85.5 cents per share, marking the 56th consecutive increase in its dividends. 3M also significantly increased its share repurchase estimates for 2013-2017 from $7.5-$15 billion to $17-$22 billion. [3] The company purchased $5.2 billion of stock in 2013 and estimates that its stock repurchases for 2014 will be $4.5-$5 billion. Looking at 3M’s history of regular dividend growth, and the increased share repurchase expectations for the coming years, shareholders can expect to see further increases in shareholder value, even if a down market offers headwinds to a higher share price.

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Notes:
  1. 3M’s Bernstein Conference Presentation, May 28, 2014, www.3m.com []
  2. IMF World Economic Outlook: Legacies, Clouds, Uncertainties, October 2014, www.imf.org []
  3. 3M’s Goldman Sachs Industrials Conference Presentation, November 13, 2014, www.3m.com [] []