3M Co (MMM): What Kind of Return Can Investors Expect from This Stock?

Page 1 of 2

One of the best things about investing in blue chip stocks is their predictable business results. It is near impossible to predict the future earnings of an exploration & production company with three wells out in the Gulf of Mexico, but it is not so difficult to foresee the general earnings level of an industry giant like The Coca-Cola Company (NYSE:KO).

Many investors believe that if you just buy a handful of blue chip stocks you’ll do well in the long run. However, simply buying great companies will not necessarily lead to great returns. Investors who think this way are missing the key component of investing: valuation. Valuation does not have to be complicated, but it must be done in order to know whether you are going to get a high return or a low return on a stock.

3M Co (NYSE:MMM)

Let’s take a look at 3M Co (NYSE:MMM), a component of the Dow Jones Industrial Average, and see if we can figure out what kind of return we’ll earn if we buy it today.

Grows With Global Economy

3M is known for inventing Post-It Notes and Scotch Tape, among other things. It owns a diverse array of businesses, mostly involved in technology and manufacturing. It has a strong balance sheet and is able to borrow debt at extremely low rates of interest. This gives the company the flexibility to expand while not risking running out of money if a recession were to hit.

3M competes with a number of companies due to its diverse operations. One of its competitors in healthcare is Johnson & Johnson (NYSE:JNJ). Johnson & Johnson is a market leader in most of the markets in which it competes. Like 3M, Johnson & Johnson owns a diverse group of businesses that allows it to produce a predictable stream of income year after year.

However, 3M and Johnson & Johnson are so big and diversified that it is difficult for either one to grow faster than the general economy. Over the last ten years, 3M has grown sales at an annual rate of 6.83%. Johnson & Johnson grew sales at rate of 6.69% per year. These growth rates include sales added due to acquisitions, so the organic growth rates are somewhat lower. By comparison, U.S. grew GDP by just under 4% per year over this same timeframe. It is unreasonable to expect 3M to grow much faster than nominal GDP in the future.

Expected Return

Mature companies like 3M produce a lot of free cash flow. Since cash enables the company to pay a dividend and invest in growth, we want to base our valuation on free cash flow.

Since 2002, 3M has averaged a 14.44% free cash flow margin. This means that for every $100 in sales, 3M earns $14.44 after expenses. The great thing about 3M is that it nearly always turns $100 in sales into the same amount of free cash flow, meaning that we just have to predict what sales will be to know what free cash flow will be.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!