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

3M had $29.6 billion in revenue over the last four quarters. In an average year, 3M would produce $4.27 billion in free cash flow from that level of sales (29.6 x 14.44%). The company’s market capitalization is $68.3 billion. If you divide $4.27 billion by $68.3 billion, you get a free cash flow yield of 6.25%.

You can think of the free cash flow yield like the coupon on a bond. If 3M continues at the same level of sales, then investors who buy the stock today should expect a 6.25% return over the long run. However, 3M will probably grow sales at about 4%, so we can just add 4% to 6.25% and get an estimated investor return of 10.25%.

As a ‘value’ investor, I do not like to pay for growth. I want to earn 10% plus growth. So 3M does not look like an attractive investment to me.

However, if we apply the same methodology to Intel Corporation (NASDAQ:INTC), its stock has a free cash flow yield of 10.5% plus the future growth rate of Intel’s sales.

Intel is the largest semiconductor company in the world. Its only real competition comes from Advanced Micro Devices, Inc. (NYSE:AMD). But Intel is much larger than AMD; Intel had about $54 billion in sales in 2011, while AMD had about $6 billion. Intel’s size advantage allows it to spend much more on R&D, which is why AMD has never been able to eat into Intel’s profits.

When a company has a moat as wide as Intel’s, you can usually count on it to continue earning a lot of free cash flow in the future. The company is facing a rough PC market right now, which is why its stock is so cheap. But investors with a long time horizon will probably earn higher than a 10% annualized return on Intel’s stock.

Bottom Line

Before investing, always make sure you know what kind of return to expect. Investors in 3M can expect a 6.25% return plus any growth that materializes, while investors in Intel can expect a 10.5% return plus growth.

But remember that growth can be negative, so always allow for a margin of safety before you invest. Always buy at a price that rewards you with a high return even if the company does not grow and consider any growth a bonus.

Have a question about investing? E-mail me at: investorquestions@gmail.com

The article What Kind of Return Can Investors Expect from This Stock? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.