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Dow 30 Profile: 3M Company
From Humble Beginnings
3M Company (MMM - Free 3M Stock Report) traces its roots back more than 100 years. In 1902, five businessmen from Two Harbors, Minnesota set out to mine what they thought was corundum, a mineral ideal for manufacturing sandpaper and grinding wheels. The deposit proved to be a low-grade anortho site, however. Sales of the poor-quality mineral were extremely hard to come by, and the newly minted Minnesota Mining and Manufacturing Company nearly failed. The group persisted, though, and turned its attention to making sandpaper products using abrasive materials purchased from an outside source in nearby Duluth, Minnesota. Years of struggle ensued. In 1910, the company moved its headquarters to St. Paul, Minnesota, and eventually turned the corner. Indeed, research into customers’ preferences resulted in many product and service improvements, and a near disastrous quality problem led to an ongoing quality control program. Technical innovations spurred further successes like the Three-M-ite abrasive cloth, the company’s first “exclusive” offering. It quickly became a bestseller among automakers and repair shops. In 1916, 3M was debt free, which enabled it to pay its first dividend of six cents a share. In 1917, its revenues reached the $1 million mark.
Research & development became a key focus early on for 3M, once management realized that new or enhanced products would drive top-line growth. In the early 1920s, 3M introduced the world’s first waterproof sandpaper, which was utilized heavily by automobile and machinery manufacturers. In 1925, the company invented masking tape. This product, the first of many Scotch brands, was essentially 3M’s first step toward becoming the diversified conglomerate we know today. In 1929, the company founded The Durex Corporation in Europe, its first international enterprise. This opened the door to a slew of growth opportunities overseas.
A Depression-Era Standout
Although the 1930s was a difficult time for most American companies, 3M managed to flourish thanks to sound fiscal policies. It expanded its workforce and facilities, and paid dividends every year. In the middle of the decade, the company developed a clear cellophane tape, which was originally marketed as a solution for box sealing but became widely popular once thousands of other uses were uncovered. Toward the end of the decade, 3M established what it dubbed a Central Research Laboratory to research and develop technologies with long-term potential. By the end of the decade, the company had five diverse businesses: Abrasives, Masking tape, Cellophane tape, Roofing Granules, and Adhesives.
More Than a Half Century of Rapid Expansion
During World War II, automobile production halted, so 3M sales representatives were forced to find new customers. They found hundreds of industrial uses for the company’s products, vastly expanding the company’s Adhesives segment in the process. The world’s increased use of machinery continued after the war, too, permanently augmenting demand for 3M’s abrasives. The decade also saw the company’s development of magnetic sound recording tape, which essentially revolutionized the entertainment industry. In 1946, MMM stock was listed for the first time on the New York Stock Exchange.
Things continued to go well for the company during the economic boom that characterized much of the 1950s and 1960s. 3M rolled out a wide array of offerings, including commercial videotape, Scotchguard fabric protector, and Scotch-Brite cleaning pads. In addition, an idea from three surgeons for an adhesive-backed surgical tape led to the company’s growing involvement in the healthcare industry. The company also opened its first research facility overseas, and continued to expand its presence in foreign markets. Finally, in 1969, the first man walked on the moon wearing space boots with soles made of synthetic material from 3M.
Over the next 20 years, the company continued to expand its technology base and product offerings. In the 1970s, 3M made products that held automotive parts in place, fastened diapers, provided backup security of computers, gave dentists new filling materials, helped prevent the theft of library books, etc. In 1976, MMM shares became a component of the Dow Jones Industrial Average, and, in 1979, annual sales surpassed $5 billion. In the 1980s, the company realigned its businesses, so they could work together to develop new technologies. Also during the decade, a 3M scientist used an adhesive that didn’t stick to create “temporarily permanent” book makers. Post-it Notes were born, and rapidly became a worldwide best seller.
The company continued to expand rapidly, both in terms of product offerings and geographic reach, during the 1990s and 2000s. 3M had operations in roughly 60 countries, and international markets began accounting for more than half total sales. The company also began to work on several corporate initiatives including reducing waste and pollution, improving productivity, reducing costs, and developing products more quickly and efficiently.
Today, 3M is a major player in the global economy. The company has operations in 65 countries, and employs more than 84,000 people. 3M’s six distinct business— Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications—produce over 55,000 unique products. In 2011, revenues grew to $29.6 billion; operating profits were $6.2 billion.
A Sector-by-Sector Breakdown
The Industrial and Transportation segment is 3M’s largest in terms of sales and profits. The group serves a broad range of markets, such as appliances, paper and packaging, food and beverage, electronics, automotive OEM, and automotive aftermarket to name a few. Products include tapes, abrasives, filtration devices, acoustic systems, etc.
The Health Care segment is the conglomerate’s second largest division in terms of sales. Its operating margin was 29.6% in 2011, which was more than one-third wider than the company-wide 20.9%. This group sells things like tapes, dressings, casting materials, stethoscopes, information systems, and transdermal drug-delivery systems to medical clinics, hospitals, pharmaceutical companies, and dental offices.
The Display and Graphics business serves markets that include electronic display, traffic safety, and commercial graphics. It sells optical film solutions for LCD displays, computer screen filters, reflective sheeting for highway lane markers and transportation signs, and a host of mobile device-related technologies. Following a few rough years that coincided with the 2007-2009 recession, the segment has gotten back on the growth track mostly thanks to robust global demand for all sorts of gadgets and electronic devices that have LCD screens.
The Consumer and Office unit houses the office supply, stationary, construction, home improvement (do-it-yourself), and home care arms of 3M’s lineup. Last year was a bounce back one for this segment, thanks to pent-up demand that lingered in various marketplaces.
The Safety, Security and Protection Services segment serves a broad range of markets that, simply put, augment the safety, security, and productivity of workers, facilities, and systems. The breadth of the product offerings is wide, but lines include personal protection products like reusable respirators and protective equipment; general security offerings including border and civil security solutions and surveillance products; and track and trace offerings that use RFID technology.
Last, but not least, is the Electro and Communications business. This segment serves the electrical, electronics, and communications industries. Customers range from electric utilities and telecoms to OEMs and aerospace companies; products include a vast array of systems, solutions, fluids, tapes, screens, and monitors. This division was hit the hardest during the 2007-2009 recession, but has subsequently emerged as 3M’s fastest-growing unit.
Investing in Growth for the Next 100 Years
Management has said 3M plans to continue investing heavily in research & development. The conglomerate plows back 5%-6% of sales into R&D and related expenses year in and year out. This figure is quite high for a diversified manufacturer, but it is one of the main reasons 3M has been extremely successful in padding its portfolio of offerings as well as its growth statistics.
The company also makes acquisitions on a fairly regular basis. The purchases help 3M to expand its product base, bolster its technology portfolio, and extend its geographic reach. In 2010, management went on a shopping spree, spending more than $1.8 billion on various deals. Top brass said it plans to continue using free cash flow (cash flow from operations less capital expenditures) on acquisitions, hoping to add five percentage points of growth to the top line every year via enterprise purchases. Subsequently, in 2011, 3M spent a total of $649 million on additional acquisitions, and further expenditures of this kind would come as no surprise.
The company also keeps up a strong commitment to enhancing productivity, quality control, and the like by maintaining a rather large budget for capital expenditures. Management earmarked more than $1.3 billion to be spent on various facilities, upgrades, expansions, and improvements in 2011.
An Attractive Issue
This equity should appeal to a wide range of investors. MMM shares are not going to make average retail investors millionaires overnight, but the blue chip is an ideal buy-and-hold candidate. The company has paid almost 384 consecutive quarterly dividends, and has increased the annual payout in each of the past 54-plus years. The stock also has a low beta, and the company’s balance sheet has historically been solid. Both of these factors should appeal to conservative investors. 3M’s strong financial position should also help it to continue fueling its growth engine over the long haul.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.