Industrials Segment Drives Growth For 3M In Its Fourth Quarter

3M (NYSE:MMM) reported its fourth quarter and full year earnings on January 24, 2016. While the revenue was in line with consensus, the company managed to beat the EPS by a penny. 3M also reaffirmed its outlook for 2017, of earnings expected to be in the range of $8.45 to $8.80 per share, with organic local-currency sales growth of 1% to 3%.

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Three of the company’s five business groups delivered positive organic growth in the fourth quarter.

• Organic growth in the Industrial segment turned positive in the quarter, and was a key driver in the growth of the company. A strong 5% organic growth was reported, which was broad-based across the portfolio.
• 2% organic growth in the Safety & Graphics segment was reported as a result of a good performance in personal safety and roofing granules businesses.
• A 1.3% rate was seen in the Health Care business, at a similar level to the third quarter. A return of the momentum in this business is expected as the company moves forward in 2017.
• Organic growth at Consumer was down 1%, as it was negatively impacted by inventory reductions throughout the retail industry.
• The company’s Electronics & Energy segment closed out the year with another quarter of sequential improvement, posting organic growth that was down marginally, while again expanding its margins.

Focusing on margins across the company, the company delivered a strong performance. The metric increased by over 200 basis points to nearly 23%, ranging from 30% in Health Care to almost 21% in Safety & Graphics. This improvement was primarily a result of favorable raw material prices. Given the company’s international presence, adverse foreign currency translations are bound to affect its growth. In the quarter, this negatively impacted the sales by 0.8 percentage points.

Despite a slow top line growth, the operating income and net income were up by more than 11%. While these numbers look impressive, if we delve deeper into the factors responsible for this growth, it may be a little concerning. The company’s SG&A spending in the quarter fell 0.7% to $1.53 billion. However, what is more disconcerting is the fact that the R&D expenditure fell 2.8% to $421 million. The company had earlier stated its intentions of spending $1.8 billion in FY 2016 on R&D; however, it failed to reach that level of spending, with $1.74 billion expended in the year. R&D is at the core of the company, and is the reason why the company is where it is today. With a decline in the spending, the company will not be able to achieve significant top line growth.

3M’s EPS has also risen double-digits in the fourth quarter, and a strong 7.7% for the year. However, one needs to consider the share repurchases undertaken by the company while assessing its bottom line growth. In the fourth quarter, the company spent a massive $1.6 billion on buybacks and dividends. For the full year, the company returned $6.4 billion to shareholders, including cash dividends of $2.7 billion and gross share repurchases of $3.7 billion. The company intends to continue this strategy in 2017, with expected share buybacks to be in the range of $2.5 billion to $4.5 billion. This implies that the company is spending more on share repurchases and dividends than it makes in net income. The company’s debt figures have been on the rise, increasing almost a whopping $2 billion year-on-year, as on December 31, 2016, which would mean that the company has been borrowing money to return it to the shareholders. Such a strategy will not be sustainable in the long term.

Have more questions on 3M? Have a look at these links below:

• Will The Industrial Segment Return To Positive Growth In The Fourth Quarter For 3M?
• As A Part Of Its Growth Strategy, 3M Divests From Some Of Its Businesses
• How Will 3M’s Industrial Segment Perform In 2017?
• R&D: One Of The Driving Factors Behind 3M’s Growth
• How Is 3M Expected To Perform In 2016?
• 3M Trims EPS Guidance Amid Flat Sales
• Will 3M’s Health Care Division Again Drive Growth In The Third Quarter?
• 3M Teams Up With Alphabet’s Verily For Population Health Management Tools
• Why Did 3M Acquire Semfinder?
• How Will 3M Grow Its Consumer Segment In The Future?
• What Trends Will Ensure Growth For 3M From Developing Markets In The Future?
• How Important Is The US For 3M?

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