Replies to post #2044 on The Rising Influence of Rising Affluence

[DewDiligence]

3M raises dividend for the 53rd (!) consecutive year:

http://finance.yahoo.com/news/3M-Increases-Dividend-for-the-bw-882501262.html?x=0&.v=1

At the current share price, the new dividend yields 2.7%.

For good measure, 3M also authorized a $7B buyback program, but this strikes me as more of a psychological boost than a real one insofar as there is no target date for actually buying the shares.

[DewDiligence]

3M—In the cover story of today’s issue, Barron’s concurs with the
assessment in a recent post on this board that 3M is the world’s
greatest broad-science company. 3M, which derives 65% of sales
ex-US, probably has the largest participation from emerging markets
of any multinational tech or industrial company. More important,
3M’s average profit margin in emerging markets is higher than
its overall corporate margin (#msg-59851230), a point that some
investors evidently overlook. See #msg-54817180 for a related story.

›Heartland Tech Titan

http://online.barrons.com/article/SB50001424052970204395804576162513319109354.html

FEBRUARY 26, 2011
By LESLIE P. NORTON

Think that the axis of American ingenuity lies squarely in sun-drenched California? Think again, and direct your gaze at an unremarkable corporate park in the icy reaches of Minnesota.

This is the home of 3M, and people around the world interact daily with its products—from fiddling with Scotch tape, to leaving urgent messages on Post-its, to parking their posteriors on Scotchgarded furniture. Last year, Booz & Co., the consultant, named 3M the third most innovative company in America, after Apple (ticker: AAPL) and Google (GOOG). On any given day, you can find 3M's inventors working on such products as ultra-skinny panels for solar cells, or anti-microbial touch screens that let your fingers dodge co-workers' germs. Yet while shares of Apple have soared since the market bottomed in March 2009, 3M's stock (MMM) has crawled ahead. Last year, it climbed 7%, about half the S&P 500's gain.

That's about to change. Shares of the former Minnesota Mining and Manufacturing Co. are entering a sweet spot, thanks to a blizzard of new products and the rising popularity of 3M's wares outside the U.S. Over the next several years, 3M brass say, sustainable top-line growth will double, to 7% to 8% a year. If that prediction is correct, annual earnings probably would rise at least 60% over the next five years, boosting the stock commensurately.

Given this scenario -- which seems very plausible -- 3M shares look tremendously appealing. Robert Hagstrom, who runs the Legg Mason Capital Management Growth Trust, counts 3M among his largest holdings. "It has a clean balance sheet, it's a multinational, and megacaps are without a doubt the cheapest part of the market," says the money manager, who has been adding to his stake lately. Hagstrom, who is the author of The Warren Buffett Portfolio, believes that the company, especially at its current price, has many attributes of a classic Buffett selection.

Last year, 3M made $4.1 billion, or $5.63 a share, on $26.7 billion in revenue. The earnings blew past the guidance the company had provided early in the year, when the economic outlook was cloudy, and were well above the depressed level of 2009, when the big manufacturer earned $3.2 billion, or $4.52 a share. For the current year, 3M is forecasting 5.5% to 7.5% internal revenue growth and earnings of $5.95 to $6.20 a share, after pension expenses [#msg-59586860]. (Without them, the range is $6.17 to $6.42.) Management contends that 20%-plus operating margins are doable over the next several years, which would be an industry-leading level. The robust sales forecast reflects the company's success at refreshing a stale product line over the past few years, improving productivity and rationalizing capacity.

The main hand behind the revival is that of CEO George Buckley, who took the helm in 2005, after having worked at powerboat maker Brunswick. Even in the Great Recession, Buckley pushed to boost sales abroad, do more research and manufacturing outside the U.S. and broaden 3M's product lines, without staunching its lifeblood -- research and development. The holder of 16 patents himself, he was an excellent candidate to head a company whose stock in trade is innovation.

On a sub-zero day this month, the Minnesota roads are crunchy with salt, and the 3M campus in St. Paul is mercilessly icy. Inside, Buckley is fighting a cold. Still, he's peppy. The company has just raised its dividend for the 53rd consecutive year and announced a major stock buyback, and Buckley seems confident that strong sales growth is sustainable, despite 3M's size. "If the law of averages takes over, how do you break that pattern?" he asks, rhetorically. "You find a way to create pockets of growth within the 3% [growth] market that are growing at 6% or 7%. You do that through innovation, through the creation of new markets, by expansion geographically."

For all that 3M is known for Scotch tape and Post-its (a boyfriend famously breaks up with a Sex and the City heroine via Post-it), it derives about a third of its revenue from industrial and transportation products, such as car waxes and abrasives.

The company's second-largest unit, at just under 20% of sales, is health care, whose wares include inhalers and orthodontic devices, including Incognito "invisible" braces for teeth. The health-care business is growing swiftly, and its earnings growth stacks up nicely against that of rivals like Smith & Nephew (SNN) and Covidien (COV).

The consumer and office division, which houses Post-its and consumer tapes, accounts for less than 15% of corporate revenue, but it is expanding nicely, too. So is the display and graphics unit, which makes reflective signage for highways, enormous graphic film for advertising, plus films that boost the brightness of electronic-device displays.

3M also is involved in safety, security and protection (which includes security systems and face masks). It also has an electro and communications unit that sells clear adhesives, high-capacity cables and flexible circuits for printers.

Last year, 3M spent about $1.43 billion -- 5% of sales -- on R&D, the highest percentage among its peers, except for Danaher. It has 35 international labs, and 7,500 of its 80,000 workers are in R&D. In 2010, it won 2,400 patents and launched 1,300 products. Today, about 31% of revenue comes from new products, up from 21% five years ago. The goal: 40% by 2015.

Whether it's a tape dispenser that sits atop your wrist and makes wrapping gifts a snap, or reflective film that makes computer, iPad and smartphone screens brighter, many new products evolve out of the science used to create older ones. For example, while industrial adhesives are opaque, 3M's labs created transparent, sterile versions, such as liquid bandages, suitable for medical applications. And these, in turn, led to the adhesives that allow huge, see-through films to be wrapped snugly around buses. These films, on which huge ads are displayed, are themselves the space-age legacy of the transparencies that 3M developed for the overhead-projector presentations that once were a staple of high-school civics and science classes.

In fact, films are a huge area of growth. One that 3M is selling in limited quantities today replaces the glass in solar panels, making them one-eighth as heavy, more flexible and far cheaper to make and transport., an innovation that made the Obama administration sit up.

This year, 3M will introduce Informatics, intelligent screens with software that can track consumers' behavior on the Internet and reprogram displays to emphasize products or bits of information that might appeal to them. The powerful analytics behind the technology lets retailers measure their marketing's effectiveness. Under development: antimicrobial treatments for touchscreens, along with a screen that doesn't show fingerprints.

3M's technological ambitions span the scientific spectrum. It's working on new multitouch screens for casinos and the military, and it developed a ceramic-core cable that can carry twice the voltage of a standard aluminum cable, allowing utilities to upgrade power lines with relatively little impact on the environment. It sells high-margin software for passport scanners. It makes oral scanners, which allow dentists to precisely map a patient's mouth in preparation for orthodontic and other dental work. And it regularly refreshes mundane products like Post-its, which now use recycled paper and non-petroleum-based adhesives.

"This company has a real knowledge about material science, particularly surface chemistry, and is fast about getting it to the markets," says Ryan Burgess, an analyst who watches 3M for T. Rowe Price, one of the Minnesota giant's top shareholders.

Supplementing 3M's own R&D are minority investments in new ventures that expose it to early-stage technology and fast-growth trends, such as energy conservation, touch screen gaming and 3-D technology. The company also has made small but significant outright acquisitions [#msg-53865254, #msg-53933442]. Last year, it spent nearly $1 billion on Cogent, which makes systems that read fingerprints. And it paid $230 million for Attenti, a small Israeli company that helps make monitoring devices, like the ankle bracelet made infamous by Lindsay Lohan, that let police keep tabs on the whereabouts of anyone on probation or under house arrest. 3M's security business is small, but highly profitable.

Fred Palensky, the company's chief technology officer, quips that 3M's inventiveness is directly related to the raw winters that force Minnesotans to be self-reliant problem-solvers. [I actually think there’s some truth to this.] Palensky, who has 11 patents, is from equally frigid South Dakota.

Still, the real key to revenue growth has been the world outside the Midwest, indeed the world outside America. About 65% of 3M's sales come from abroad. The aim is to expand sales in any given region at least twice as fast as that area's economy is growing.

This global presence exposes 3M to shifts in the dollar's value–it's benefited from the greenback's weakness in recent years -- and places it in many fast-growing emerging markets. Last year, developing lands accounted for a third of sales, up from 29% in 2009 and 17% a decade ago. Over the past decade, margins in developing countries have been nine percentage points higher than the company's average [#msg-59851230]. If that holds true over the next five years and 3M simply maintains its growth rate in these nations, its overall top line growth will rise by a full percentage point, the company asserts.

In developing countries, 3M is expanding sales in part by manufacturing and doing its R&D locally. International should account for 57% of capital spending this year, up from 47% in 2010. This largesse is being rewarded. About 50% of 3M's new products now are developed outside the U.S., and new products account for 35% of all 3M sales abroad, versus the aforementioned 31% in the States.

Local scientists in India came up with a cheaper version of a traffic-cone warning system, relates Inge Thulin, who quarterbacks 3M's overseas sales. "The cone is slim, slender and still effective," says the Swedish-born executive.

Coming up with a less elaborate system fits in with a part of 3M's new game plan that Buckley terms "going down the pyramid." In the past, the big manufacturer confined itself to high-end markets. Under Buckley, it has begun to offer lower-end products, too. "We would create this entire market, and after a time, our patents went off," the CEO says, and then rivals would come in, often with inferior, but less costly products. Ultimately, 3M would be driven out of the market.

Now, however, the company is becoming a player across the entire price spectrum. Example: When swine flu broke out in the emerging world, it had the inexpensive but effective respiratory masks needed to deal with the disease.

In Asia, 3M has boosted its personnel by 45%, to 16,324, since 2005. Its sales in China are rising 20% a year. By 2015, it figures that China will represent 10% of both sales and overseas investment. In India, where gross domestic product is rising at 8% a year, 3M's annual growth may top 30%. In Latin America, the outlook is even more promising, thanks to strength in Mexico and Brazil, a large, growing middle class and a population with a third of the members younger than 14. Observes Thulin: "They aspire very much to U.S. brands."

He believes that 3M's overseas sales will top $30 billion in 2015 -- well above the $17 billion of last year, and even more than its $26.7 billion in 2010 total sales. By then, he predicts, about 60% of the company's total sales will come from the emerging markets, up from 48% today, while about 40% will be from the developed markets, down from 52%.

Brazil, China and India are a long way from Two Harbors, Minn., the town just north of Duluth where Minnesota Mining & Manufacturing was founded in 1902 by a doctor, a lawyer, a butcher and two railroad executives. Its primary mission was to mine abrasives.

In the following decades, the company thrived, pouring out thousands of new products. But in the 1990s, 3M's sales growth slowed. It began unloading money-losing businesses and shrinking its workforce. In 2001, the company hired a new CEO, Ray McNerney, from General Electric. He promptly changed the company's name to 3M and imported his former employer's famed Six Sigma system to keep a lid on manufacturing costs. But he didn't stay long. In 2005, after Boeing lured him away to overhaul its operations, Buckley succeeded him.

He found a company in which sales had stagnated and the supply chains "was out of control," says Arthur Moretti of the Neuberger Berman Guardian Fund.

In 2005, it took 100 days for a product to reach a customer. Many items hopped across multiple plants before they were finished. This drove up inventory and working-capital needs, and any retooling could produce chronic capacity shortages.

Buckley pushed hard to shorten the supply chain, revamp the production system, encourage swifter innovation, rebuild market share and "go down the pyramid."

The son of a factory worker, Buckley was born in Sheffield, England. He was the first person in his family to go to college. "All my life I had this abiding curiosity about how things work," says Buckley. "I am wholly invested in this company in an emotional way and have the confidence to be able to share ideas with people and the willingness to accept [when] somebody says: 'Even though it is a great idea, I'm not sure this will work.' "

There's plenty left to do. The overhaul of the global manufacturing operation is only about two-thirds finished, and Buckley wants more "saturation" in the emerging markets. Fortunately, he's got a solid financial base from which to implement his changes.

The company has almost no debt and generates loads of cash -- $5.2 billion last year -- enough to fund its operations, power R&D and reward shareholders. It has paid a dividend for 53 consecutive years; it's now $2.20 a share, and 3M has said that it intends to increase it at a rate somewhere between that of inflation and the company's earnings growth.

And last month, the board authorized the repurchase of $7 billion of stock [#msg-59696999].

To be sure, there's plenty of skepticism about the growth rate. It will be a huge challenge for a company with over $26 billion in annual sales to grow at twice the rate of the underlying economy. And there are shorter-term problems: soaring raw material costs, disappointing sales related to liquid crystal displays as down-market flat-panel TVs become more popular, and growing pension liabilities as interest rates stay stubbornly low and reduce earnings on bonds.

Yet the emerging markets are providing a huge tailwind for 3M. That's one reason that earnings, sales and cash flow all hit records last year.

Historically, 3M, which has a stock-market value of $64 billion, has traded at a 10% to 20% premium to the S&P 500. But at its Friday close of 90.25, it fetches 14.5 times expected 2011 net, roughly on par with the S&P 500, while boasting a dividend yield of 2.4%, versus 1.7% for the index.

"I never understand why it's so unloved and close to the bottom of its valuation range on nearly any metric," says Bruce Geller, chief executive of Dalton, Greiner Hartman Maher, a value-oriented investment shop in New York, and the manager of DGHM All Cap Value Fund. "It's a premier global industrial conglomerate. It's one of the most innovative industrials around. Its margins and ROA [return on assets] are second to nobody's." Geller thinks that 3M is worth $115 to $120 a share.

One issue that anyone thinking of buying the stock must ponder is who will be running the show a year from now.

Buckley is near 3M's mandatory retirement age of 65. He'd like to stay, but whether the board would extend his tenure is uncertain. However, 3M's bench is fairly deep. The company has said that it would look for an internal candidate to succeed the chief executive. Among those apparently in the running: Jean Lobey, who runs the safety, security and protection services businesses; Brad T. Sauer, who oversees the health-care unit, and Thulin.

Says Buckley: "You don't want a situation where the CEO stays too long. They get tired. They run out of ideas." At 3M, that doesn't seem likely to happen any time soon. No matter who's in charge.‹