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The industrials sector typically engenders little enthusiasm. As an analyst and editor specifically assigned to the sector, I get it. I won’t argue that these companies really capture investors’ imaginations the same way game-changing companies from areas like technology or media do. In my mind, they don’t need to. Even better, the area does play host to a lot of really spectacular companies, one of which I’ll advocate as an attractive opportunity today.
An American icon
Industrial conglomerate 3M (NYSE: MMM ) , while not unloved or unknown, probably doesn’t qualify as exciting, either. However, when you look under the hood, you certainly find a lot to get excited about. Founded in 1902 and based in St. Paul, Minn., the company divides into six operating segments manufacturing goods that run the gamut from films used in electronic displays (high-tech) to office supplies like Post-it notes (not-so-high-tech). Lauded as an outstanding company, 3M consistently ranks at or near the top of many noteworthy corporate excellence rankings, and for good reason.
Slow and steady
More than any other quality, 3M’s remarkable consistency is what distinguishes it from the rest. Its margins hardly ever vary. Heck, looking back into the history books, it seems little ever fluctuates with 3M. Gross, operating, and profit margins all hover right around 50%, 20%, and 15%, respectively. By no means a blockbuster growth story, the company still shows the ability to grow its business consistently at around a 5% annual clip. I know that doesn’t sound like much, but it certainly exceeds the growth rate of the economy (a sign of a strong business) and it does so like clockwork. This certainly becomes meaningful over time. It also generates fantastic returns without the need to leverage itself significantly. Since 1996, its return on equity hasn’t dipped below 20%. In fact, it consistently tallied +30% ROEs for the better part of the 2000s (the Great Recession drove them down into the high 20s). Perhaps most impressive, 3M has increased its dividend payments to its shareholders every year for 53 straight years.
I like the blue-chip industrial sector in general (pretty risk-averse at present). However, 3M distances itself from similar companies with its consistency.
10-Year Dividend Annual Growth Rate
10-Year Annual Return
|General Electric (NYSE: GE )||3.7%||40.8%||(1.1%)||(6.0%)|
|Tyco International (NYSE: TYC )||2.4%||30.0%||17.7%||(12.4%)|
|Honeywell International (NYSE: HON )||2.8%||40.7%||5.4%||5.0%|
|Illinois Tool Works (NYSE: ITW )||3.1%||34.9%||13.0%||6.1%|
|Danaher (NYSE: DHR )||0.2%||2.4%||14.9%||12.6%|
|Textron (NYSE: TXT )||0.5%||16.8%||(18.9%)||(2.6%)|
Source: Capital IQ, a division of Standard & Poor’s.
Although they’re often impressive in their own respects, none of its counterparts matches 3M’s workman-like performance. Strong across the board, the business just keeps churning year after year, enriching shareholders along the way. Consider that during this period the S&P 500 generated an average return of only 2.5%. I’ll gladly take nearly 5 extra percentage points of annual return for minimal risk.
Foolish bottom line
If, like many value-oriented investors, you prefer to control risk before seeking return (remember Buffett’s first and second rules of investing), 3M should be right in your wheelhouse, especially in an era of uncertain economic times. You pay a slightly cheap price for a company with a rock-solid balance sheet, demonstrated consistency, and an enduring commitment to its shareholders. As the legendary investor Phil Fisher insisted, “conservative investors sleep well.” If you fall among the ranks of the risk-averse, 3M seems like a stock that deserves additional consideration.
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