3 Reasons Why 3M Stock is an Attractive Industrial Play

When investors hear the name 3M (NYSE:MMM) they often think of Scotch tape. Of course, the long-time Dow Jones Industrial Average member is far more. Today, the 120-year-old industrial conglomerate is comprised of many different business lines that serve diverse end markets globally.

There are several reasons why the maker of Post-it notes should be a sticky part of a long-term portfolio from its steady growth profile to its shareholder-friendly ways. Let's take a look at three of the most compelling aspects of an investment in 3M.

 3M's Restructure May be a Major Turning Point

3M is a more streamlined business these days after trimming its business units from five to four. It now operates under the Safety & Industrial, Transportation & Electronics, Health Care, and Consumer divisions. And while the restructure is expected to result in the loss of approximately 1,500 jobs, it will make 3M a more cost-effective company and drive improved profitability. In total, the restructure is forecast to amount to $250 million to $300 million in annual operating cost savings.

But the reshuffle has been about more than just some new titles to target 3M's diverse end markets. The company has also consolidated manufacturing and supply chain functions into a new Enterprise Operations entity that is more in tune with its customers. The early results have been positive as seen in the most recent quarter when all four segments experienced top line growth despite a challenging economic backdrop.

Aside from the more focused and efficient business model, 3M's relentless pursuit of product innovation continues to be the engine behind its growth. The pandemic economy has seen the company's cleaning, safety, and home improvement products in high demand and this should persist for at least the remainder of the year. As its non-consumer, industrial end markets come back online (such as automotive and aerospace), stronger growth in the non-consumer segments should lead to more balanced results.

And while 3M is a U.S. company, it generates nearly two-thirds of revenue from outside the U.S.—and it will continue to lean on overseas markets for untapped growth potential. More localized decision-making associated with the restructure should make international customers happier and improve 3M's competitive advantage.

Granted, such heavy international exposure makes 3M more vulnerable to foreign exchange risk. But with U.S. government bond yields moving sharply higher in recent days, a stabilizing dollar could turn a headwind into a tailwind for international centric industrials like 3M.

3M is Among the Most Shareholder Friendly Companies

Last year around this time, 3M hiked its quarterly dividend to $1.47 per share. This marked the dividend aristocrat's 62^nd straight year of dividend increases putting it in rare company among blue chips.

Given 3M's robust cash flow and overall financial strength the dividend is not only secure but likely to continue to grow modestly over time. Currently, 3M shares offer a 3.4% dividend yield which is significantly above the average industry dividend yield—and the 7^th highest income payout in the Dow-30.

To cement its status as one of the most shareholder-friendly large caps, 3M also has a stock buyback program. The program was put on pause last year but management recently noted it is likely to resume in 2021.

 3M has an Attractive Valuation

Like many stocks, 3M has rebounded nicely off its March 2020 bottom but is still trading more than 30% off its January 2018 record high of $259.77.

After posting a strong fourth quarter in which earnings per share (EPS) beat the analyst consensus by more than 10%, 3M has a head of steam heading into the new year. Meanwhile, its stock price has pulled back in lower volume after a big green spike on January 27^th amid general market weakness.

This represents a good time for investors with long time horizons to pounce. If 3M can break through resistance around $180 it could be well on its way to revisiting its peak from three years ago. 

From a valuation perspective, 3M is going for a reasonable 20x forward earnings. This is roughly in line with its historical average.

But where the valuation gets more interesting is when you factor in the company's growth. Given its historical growth rate of about 7%, 3M is one of the best values in the industrial sector. Management recently said it expects 2021 sales growth to be in the 5% to 8% range which is roughly in line with its historical average of 7%. It has a P/E-to-growth, or PEG, ratio of roughly 1.9x compared to its diversified industrials peer group average of 2.1x.

So, given 3M's steady track record of growth and expectations of more normalized growth in the year ahead, the stock is a good value here. As its restructuring initiatives and a healthier industrial sector spark an improvement in operations, 3M will continue to keep customers and shareholders smiling.