Friday 15 December 2017

Share watch: 3M shows that innovation provides the path to growth

The culture of innovation is 3M’s strong suit
The culture of innovation is 3M’s strong suit

John Lynch

It is often said that sliced bread is one of the great human innovations, but my particular preference when it comes to picking items that made the world a better place is the post-it. What would a day in the office be without the post-it? If these little sticky yellow pads were not invented we would never know when a colleague had gone for a coffee.

The multinational under scrutiny this morning not merely gave us the post-it, but also gave us scotch tape and helped put a man on the Moon. It is the American group 3M which boasts group sales of $30bn (€28bn), in 200 countries, with operations in 70 countries, and 90,000 employees worldwide.

3M, based in Minnesota, was previously known as the Minnesota Mining and Manufacturing Company.

It is a diversified global company catering to a wide variety of industries with thousands of different science based products. It makes indoor window insulators, stethoscopes, respirators, scour pads and cellophane tape and funny little note-pads.

The culture of innovation is 3M's strong suit. It manages its operations through five business groups; industrial, safety and graphics, healthcare, electronics and consumer. Although it does not report geographically, some 40pc of group sales are in the US.

The Asia/Pacific market accounts for 30pc, Europe/Middle East/Africa 20pc and Latin America the remainder. However, the group faces low margins in the US and threats in emerging markets in some of its business.

The industrial division is 3M's largest, accounting for one third of group sales. It services a range of markets such as the auto, food and beverage, appliances, and printing and paper. Its major industrial products include specialty industrial tapes, sealants, adhesives and advanced ceramics for the oil and gas and defence industries.

The safety and graphic division makes up a fifth of 3M group sales with products for personal protection, traffic safety, security and roofing granules for asphalt surfaces.

The company's electronic and energy division includes film solutions for the electronic display industry, like iPhones, high performance fluids, display tape and touch screen systems. Its energy solutions include pressure sensitive tapes and resins. This division accounts for one sixth of all sales.

Interestingly the group has a healthcare division which serves markets that include medical clinics, hospitals, dental and orthodontic practitioners. Its products and services include medical and surgical supplies like dressings, medical tapes and wound closure products. It also markets oral care solutions, stethoscopes and a wide variety of surgical tapes and masks.

Surprisingly its consumer division is the group's smallest and contributes one seventh (over $4bn, €3.7bn) to total sales. Its markets include office suppliers, home improvement and pharmaceuticals.

3M's sales for 2016 were $30bn, with a net income of $5bn (€4.7bn). The share price has risen consistently in the last five years moving from $83 (€77) to $191 (€179) today. Its price to earnings multiple is 22, valuing 3M at a considerable $114bn (€107bn). The company is very aware of its investors and has for 100 years paid uninterrupted dividends and over the last 60 years increased them annually (this, of course puts it in an heroic category as far as I am concerned). Last year it returned $6.4bn (€6bn) to shareholders between dividends ($2.7bn, €2.5bn) and a share buyback programme ($3.7bn, €3.4bn).

The group's competitive advantage is its diverse technology portfolio. While much of this portfolio is petroleum based and oil prices are a factor, 3M has a strong R&D capability, good acquisition strategy and a robust industrial business.

In addition its ability to create a steady stream of products makes it unique and commercially successful. However, there is no way around it - 3M is not a cheap share. But with a strong balance sheet, a satisfactory credit rating and healthy free cash flow, it is still a share worth considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business