3M Company: Dividend superstar almost a buy
While surveying the investing landscape for worthwhile dividend investments I seem to keep running across certain names more than others. One of those is the 3M Company (MMM: 83.2998 +0.66%, yld: 2.52%) – a self-described diversified technology company with businesses in everything from materials and manufacturing to electronics and health care.
But, most important to me, it has one of the best dividend-growth track records out there. With the stock now down 50% from its 2007 highs, it seemed like a good time to take a closer look.
A dividend star among stars
MMM’s dividend track record stands out even among its fellow Dividend Aristocrats – those companies that have increased their dividends for 25 consecutive years or more. MMM is a member of an even more elite group – companies whose stock dividends have gone up 50+ years in a row.
The most recent dividend increase was just this month, when MMM increased its quarterly dividend from $0.50 to $0.51 per share. Granted, this meager 2% increase wasn’t much (MMM’s five-year dividend growth rate is about 9% according to DividendInvestor.com) but in the current market and economic climate it’s a huge positive as far as most dividend investors are concerned.
Valuation looking increasingly attractive
Taking the current most conservative earnings estimate for MMM at MSN Money over the next couple of years ($3.45) and the estimated five-year earnings growth rate of about 9% and plugging them into a DCF calculator gives a fair value for MMM of about $45 – just a bit below where it’s currently trading. Dropping the five-year earnings growth rate to 5% gives a value of around $38.
A check with Ockham Research reveals that MMM’s price/sales and price/cash earnings ratios are well below recent historical values – suggesting that the stock appears relatively undervalued at these levels. An above-average dividend yield (compared to recent history) is also considered a positive. Overall then, from a valuation point of view, MMM starts to look increasingly interesting at about $45 or lower.
Oversold, and falling into support range
A 38-year price chart of MMM (below) shows the stock now trading about 50% below its 2007 highs, and well below its long-term linear regression trendline (shown here at about the $61 level). Still, it could fall to $30 and not break through the bottom of its long-term uptrend channel (here three standard errors below the linear regression trendline).
The horizontal lines on the chart represent potential downside support levels in the $37-$46 range – just below the stock’s current price of around $47 per share. Interestingly these roughly coincide with the stock’s previously calculated fair value range.
The price oscillators – shown in the middle two graphs – are at “oversold” levels not seen since 1974. It’s important to note that while such extreme readings can often indicate a near-term price reversal, they’re also indicators of significant strength in the direction of the move that caused the extreme reading and rarely coincide with actual price bottoms (or tops).
Finally, the top graph showing MMM’s dividend yield suggests that a 5% or even 6% yield would not be unusual based on history. A yield at those levels, as was seen in the 1980s and 90s, would represent price levels of about $41 and $34, respectively.
Bottom line
At its current price of about $47, MMM is approaching levels that both fundamentals and technicals suggest could represent an interesting buying opportunity. I’ll begin looking to initiate a long position on further declines – perhaps by selling puts – with an eye toward owning the stock in the $40 range or lower.
