FOOLISH FOUR PORTFOLIO

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All About 3M, Part 1
The company analysis series resumes

by Chris Rugaber (TMF RFK@aol.com)

Alexandria, VA (June 24, 1999) -- Have any of the traffic signs in your area looked a little more yellow recently? If so, this is thanks to a new Minnesota Mining & Manufacturing (NYSE: MMM) technology that provides brighter reflection for roadside signs.

That is just one of the seemingly endless ways that Foolish Four company 3M maintains a constant, yet quiet, presence in our lives. As a result, this somewhat mundane corporation has built a $15 billion a year multinational business. Most Americans encounter many of 3M's 50,000 products on a daily basis, whether they know it or not.

Let's take a look at this company, using the same format we used for Foolish Four company International Paper (NYSE: IP). Given 3M's size, we won't get it all done today, so Part 2 will have to wait until next week.

WHAT DOES 3M DO?

Minnesota Mining & Manufacturing is a very diversified international manufacturer of industrial, consumer, transportation, and health care products. The company's best known brands are its Scotch tapes and Post-It Note products (what it calls "repositionable notes"). The Post-It Note idea came from a 3M engineer who wanted a portable marker for his church hymn books.

Yet 3M's product range is much broader than that and is really quite impressive. Here's a few examples of what 3M's 7,100 scientists have developed over the years: brightness enhancement films for electronic displays, disposable diaper closure tapes, health information software, respiratory protection masks, CFC-free inhalers for asthma sufferers, fiber optic network connectors, automotive components, medical bandages, security laminates for identity cards, overhead projectors, and Aldara cream, a new treatment for genital warts, which is apparently an alternative to "painful treatments involving surgical procedures or application of acids or freezing compounds," according to the company's annual report. Well, I'm sure it's a preferable alternative to acid.

Anyway, the company is usually awarded over 500 patents a year for its innovative products. In 1998 the company earned 611 patents, placing it 11th among U.S. companies. 3M organizes its huge range of products into three lines of business.

The largest is its Industrial and Consumer division, which accounted for $7.71 billion or 51.4% of the company's 1998 revenues of $15.02 billion. This division includes the familiar tapes and "repositionable notes," but also many other kinds of adhesives, office products, electronic materials, and telecommunications products such as "Microflex Circuits," which connect components in ink-jet printers, cell phones, laptops, and pagers.

While the Microflex Circuits are doing so well that the company has built a new plant in Singapore to manufacture them, the rest of the division hasn't been so hot. Profits declined 6.3% in 1998, and revenue declined 0.8%. We'll look at the reasons for these declines next week.

Next is the Transportation, Safety and Specialty Materials division, which provided $4.13 billion in revenues in 1998, or 27.5% of that year's total. This division makes the reflective sheeting and materials that are showing up on road signs, large trucks, and safety clothing. In addition, it makes automotive parts, respiratory protection masks, commercial graphics technologies, and the aforementioned optical films for electronic displays in computers, pagers, palmtops, and cell phones.

This division also saw revenues decline in 1998, down about 1.8% from the year before. Operating income fell 6.9%.

Finally, 3M's Health Care division earned $3.08 billion in revenues last year, or 20.5% of the company's total sales. This part of 3M produces various bandages, medical tapes, and dressings; pharmaceuticals, such as the aforementioned genital wart cream; health information software, such as a patient record system; and dental products, such as fillings and bonding agents.

Given the health care industry's worldwide growth, it's not too surprising that this was the only division to increase sales in 1998. Revenues rose 2.4% from 1997, and operating income jumped 9.1%.

WHAT DOES 3M TELL US ABOUT THE FOOLISH FOUR?

Minnesota Mining & Manufacturing does provide anecdotal evidence that high-yield Dow investing works and, as we saw with IP two weeks ago, demonstrates one of the advantages of the RP method. Since the RP formula involves squaring the yield (or taking the square root of the price), it places a greater emphasis on dividend yield than on share price. This is a good thing, because it reduces the likelihood of the Foolish Four picking a stock just because of an artificial share price change, such as a stock split.

In fact, the only other time this decade that 3M was a Foolish Four stock was in 1996, and only as a result of the Foolish 4.1 method of ordering the High Yield 10 stocks by price. 3M's share price was fourth lowest of the ten highest yielders, partly as a result of the company's 1994 stock split. Under the RP Method, 3M didn't make the Foolish Four until this year.

Either way, in 1996 the company behaved exactly as Foolish Four investors would have wanted. After a disappointing 1995, which saw 3M's net income drop by about a quarter, 3M's stock posted a 34.4% total return as net income increased almost $600 million, or 56.4%. Let's hope for a repeat performance this year!

Next week, we'll ask the other two questions we ask of our companies: "How did 3M become a Foolish Four company?" and "What should Foolish Four investors look for this year?" After all, the extra amount of time spent on this company is probably appropriate given its sprawling nature.

Fool on!

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06/24/99 Close
Stock  Change   Last
--------------------
CAT  -   5/8   59.00
JPM  -2 11/16  127.94
MMM  -2  1/2   88.75
IP   -   7/16  53.00



                  Day    Month   Year   History
         
        FOOL-4   -1.63%   2.54%  24.50%  26.35%
        DJIA     -1.24%  -0.24%  15.53%  15.07%
        S&P 500  -1.30%   1.07%   7.62%   7.88%
        NASDAQ   -1.70%   3.38%  16.48%  18.07%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     59.00    36.95%
 12/24/98   22 Int'l Paper   43.55     53.00    21.70%
 12/24/98    9 JP Morgan    105.51    127.94    21.26%
 12/24/98   14 3M            73.57     88.75    20.63%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1416.00   $382.00
 12/24/98   14 3M          1030.00   1242.50   $212.50
 12/24/98   22 Int'l Paper  958.12   1166.00   $207.88
 12/24/98    9 JP Morgan    949.62   1151.44   $201.82

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5054.19