Brigitte Bouvier
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Can a stock that has outperformed the S&P 500 handily over the past five years possibly be a buy?
Investment dealer Odlum Brown has a "buy" rating on 3M Co., even with the stock up a cumulative 153 per cent over the past five years. That's substantially more than the 119 per cent gain of the S&P 500, which itself has been a global superstar in the past few years.
Odlum's 52-week target price for 3M is $148 (U.S.), which represents about a 10 per cent premium over the current trading price. Why bother with a stock that has such a modest upside? Odlum makes a case for 3M as a jewel of a dividend growth company with a long and consistent record of innovation.
Founded in 1902 as Minnesota Mining and Manufacturing Co., 3M is the company behind such household and workplace staples as Scotch Tape and Post-It Notes. The company's product line is actually quite vast, including more than 50,000 industrial, medical and electronics products sold in 200 countries around the world. Two-thirds of its revenue comes from outside the United States, which suggests this is a stock that that could be considered as much global as U.S. content for a portfolio.
Odlum says 3M invests heavily in research and development and is able to dominate product categories in a way that allows it to charge premium prices. Its competitive advantages should allow it to continue generating an above-average profit margin and high return on capital, the firm argues. 3M also has a strong balance sheet and significant free cashflow that is in part channelled to investors through share buybacks and dividends. According to Odlum, 3M has increased its dividend 55 years in a row and is expected to continue this trend. The dividend yield is 2.55 per cent, according to the latest data on Globe Investor.
After a stellar run that includes a 33 per cent gain in 2013, the S&P 500 could well be poised for a pullback. Investors who feel confident in the underlying economic fundamentals in the United States and globally may want to consider 3M as a potential buy in a downturn.
Even now, Odlum and a number of other research firms consider it a buy. According to the latest Bloomberg data, nine analysts rate it as a buy, 12 as a hold, and one as a sell. The average price target is $143.41 (U.S.).
Rob Carrick