Well everyone, Lanny wasn’t the only one on this website to take advantage of the market downturn as he purchased JNJ earlier in the week. After finishing my recent obsession of building up my stake in IBM a few weeks ago, I began hoarding cash with a new target in mind. I have been monitoring this company on and off over the last year or so and the recent downturn in the market presented too good of an opportunity for me to continue sitting on the sideline. Let’s see which stock I purchased this week!
Purchase – 3M Corp (MMM)
I’m sure you all have caught on by now, but this week I finally initiated a position in 3M Company (MMM). In total, I purchased 17 shares of this conglomerate, adding $69.70 in projected annual dividend income to my portfolio. After this purchase, my total forward dividend income sits at $2,367, which is just under $400 of my goal of $2,750 by the end of the year. It feels great to be back in the game and it especially feels nice to purchase a stock during a down period that have seen our market value’s plummet and some amazing dividend stocks begin to trade at a discount. There were many reasons why I focused on 3M over other companies, so here are some of the main reasons why I chose to invest in 3M this week.
- Price to Earnings Ratio and YTD Performance – As I mentioned earlier, I have been following MMM for a long time now and one thing has always stuck out at me: MMM always seems to trade at a premium. One of the metrics of our dividend stock screener is focused on finding stocks that are trading at a lower multiple than the market. While the S&P 500 trades in the high teens or low 20s, MMM always seemed to trade in the low or mid 20s. Well, as well all know, Mr. Market has been acting crazy in 2015 and this craziness has caused MMM’s stock price to fall over 13% YTD! With this steep price reduction, MMM’s current (ttm) and forward (2016 est. earnings) P/E ratios fell to levels that are more in line with the broader market, 18.5X and 16.09X, respectively. Is MMM the lowest multiple stock available? Heck no. However, MMM was no longer trading at the premium levels I have witnessed over the years.
- Dividend History – You don’t become a Dividend Aristocrat by failing to reward shareholders after all. When MMM announced its dividend increase in December 2014, it marked the 57th consecutive annual dividend increase. Even better, as stated in the 12/16/14 press release, the company has paid a dividend for 98 years without interruption. Those two stats speak volumes!
- Dividend Growth Rate – We all know how important this metric is to the long term success of our dividend growth portfolios and MMM’s dividend growth rate has been down right impressive recently. In that 12/16/14 press release, the company increased the quarterly dividend from $.855/share to $1.025/share…a 19.9% increase. The year before that, MMM announced a 34.6% dividend increase. Wow! While these two growth rates are insane, they are definitely outliers over the company’s history. Prior to the last two increases, the annual dividend growth rates were in the mid to high single digit range. 20%+ dividend growth rates are not sustainable over the long run and I am sure the DGR will revert back to the high single digit growth rate at some point. However, I am expecting another strong dividend increase in December as earnings continues to grow, the payout ratio is below 50%, and the company has a lot of cash at is disposal (over $5 cash/share)! One of my unofficial goals in 2015 was to invest in a company that has a higher dividend growth rate than my portfolio’s rate at the end of last year (7.5%) and MMM’s recent performance blows that metric out of the water!
- Current Yield vs. 5 Year Average Dividend Yield – This is one of our favorite metrics on this website as it is a great way to assess the current value of a stock. After the pullback in price, MMM’s current yield is ~2.9%, which is much greater than their 5 year average dividend yield of 2.5%! Exactly what we like to see from this metric.
- Strong Brand Portfolio – For those of you that follow us regularly this should not be a surprise. I love companies that have strong brand portfolios and I am always looking for a discounted dividend paying company that sports an impressive portfolio. This obsession with strong brands has even led me to perform research and analyze a spin-off that has brands that are found in every household. To me, strong brands always provide companies with opportunities to create shareholder value in the form of spin-offs, sales, etc. and help a company amass a moat as the everyday consumer continues to purchase and strengthen the company’s asset. And if you spend five minutes on 3M’s website, you will realize and be amazed at how many brands the company owns. It is insane. While the brand’s aren’t as well-known or colorful as Johnson and Johnson and Procter and Gamble, MMM products can be found in every household, tool shed, basement, and contractors inventory. But it doesn’t stop there. MMM also has major product lines in the automotive, energy, transportation, electronics, and other major industries. This company is everywhere and I love it!
- One of My Foundation Stocks – Last week I wrote an article about the importance of always having a watch list prepared, which stemmed from missing out on the flash sale in the market a few weeks ago. One of the takeaways from that experience was that I should build a list of stocks that I am always willing to purchase. While I haven’t formally published this listing yet, I have been brainstorming stocks that I want to include on this listing. For the reasons listed above, MMM fits the bill and I now consider it one of my foundation stocks. Going forward, if I am unsure which stock to invest in during a sudden market pullback, I will always turn to MMM and know that I am adding to a rock solid dividend paying company to my portfolio.
Overall, I couldn’t be happier with my purchase. I added shares of a strong company to my portfolio and added a nice chunk of dividend income along the way. December can’t come soon enough so I can receive my first dividend check from them! Another bonus is that I was able to establish a large position in the company (when compared to my portfolio) and now I won’t feel the need to focus on adding to this position with my next few purchases. If I add more MMM to my portfolio…great! If not, it is okay too as I know that I have a solid foundation position in my portfolio. I will update my portfolio and goals page to reflect this purchase as well so we can continue to monitor the progress of my 2015 goals!
What do you think of the purchase? Do you own MMM or is it on your watch list? If not, what other stocks are you watching instead? Would you view MMM as a foundation stock for your portfolio?