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What's in a brand? Any investor who follows the Dow Jones Industrial Average (INDEX: ^DJI ) knows how important a strong brand can be -- and how damaging it is when a company's brand becomes tarnished. The index has undergone many changes over the years, and many of these changes were enacted in response to the diminished value of one brand or the strengthening of another.
When the automobile became a common sight on city roads, the Dow responded by adding the strongest auto manufacturers to its exclusive list. The rise of a consumer culture prompted the Dow's inclusion of the most popular department stores. Companies that developed and marketed advanced technology have found a place in the Dow's ranks in every era from the Electric Age onward. Branding mattered then, and it matters even more today.
Yesterday we examined Johnson & Johnson, Interbrand's 79th-most-valuable global brand. Today, we'll be taking a look at the brand behind 3M (NYSE: MMM ) , a Dow component since 1976 and Interbrand's 77th-most-valuable global brand of 2012, to better understand how it was built and how it has helped create one of the world's largest companies.
Building brand value
Thanks to the Interbrand consulting firm, we can analyze 3M's branding successes (or failures) since joining the most-valuable brands list in 2010, relative to some more standard corporate measures. We'll also dive into some of 3M's pivotal public moments to see how those moments helped build a brand to stand the test of time.
Over the last decade, 3M's market cap has grown 13%. Its annual revenue (with its most recent trailing-12-month revenue serving as 2012's result) has grown by 63%. The company's latest brand value is 30% greater than it was when Interbrand added it to its list two years ago. 3M's net income has left its other metrics in the dust as the company earned 80% more over the trailing 12 months than it did in 2003. Since 3M's market cap has barely budged in a decade, its bottom-line growth has resulted in a long-term valuation decline: Its P/E ratio is 37% lower than it was in 2003.
The market seems to have passed 3M over despite its brand strength. Will that continue? Let's find out.
Behind the brand
Interbrand bases 3M's brand value on the company's environmental record (ranking it No. 12 on Interbrand's Best Global Green Brands this year) and positive staff policies. 3M's diverse research and development culture also earns accolades, as does the strength of its public image.
It wasn't long ago that 3M found itself embroiled in pollution problems -- in direct contrast to that nature-friendly image Interbrand painted. In 2010, 3M's home state of Minnesota (the first "M" in 3M) sued the company over dumping of toxic perflourochemicals, or PFCs. 3M has had the government on its case because of PFCs before, but Minnesota's lawsuit passed with little coverage -- a more or less accurate continuation of the attention given to 3M's previous issues. For 3M's customers, it's water under the bridge.
3M's customer base is becoming less consumer-centric and more corporate as the company plows more R&D into advanced technology projects. Its stated goal, according to my fellow Fool Nathan Alderman, is to earn 40% of its revenue from new discoveries by 2015. Consumers still end up using 3M's products, but they're less likely to realize it than if they bought a roll of Scotch Tape or a package of Post-Its. The consumer-focused segment, which can't really be said to be 3M's bread and butter anymore, placed third in revenue and fourth in net income in its most recent quarter. Industrially focused companies can still build strong brands so long as the businesses they sell to view the products (and the company behind them) as worth the investment.
3M was an innovator in the touchscreen technology used in millions of mobile devices today, and one of its newer developments is a glass-replacing protective barrier for the thin-film solar panels championed by First Solar (Nasdaq: FSLR ) , which seems to be in rebound mode after a lousy couple of years. 3M recently bought out ceramics maker Ceradyne (Nasdaq: CRDN ) , which will be folded into the company's largest and most profitable division: its industrial and transportation group. 3M's also making a move in mobile displays with advanced LED technology, which the company hopes will hold the line against Universal Display's (Nasdaq: PANL ) coming flood of flexible OLEDs, many of which will see action in Samsung phones in the next few years. That's a lot of technological progress, whether internal or acquisitive.
3M's corporate culture is well-known in business circles, which can also contribute to its positive perception among the management staff that increasingly comprise its customer base. Its well-known "15% time" has served as the prototype for the popular employee-freedom initiatives at Google (Nasdaq: GOOG ) , where "20% time" has become a similar source of corporate pride and unexpected successes. 3M also ranks as one of the best public companies in terms of employee rights and equality. These pro-employee policies don't directly impact revenue, but they do quietly generate respect for 3M in a global corporate climate that seems to increasingly view workers (except a few top talents) as interchangeable cogs, rather than business assets.
3M's brand strength is a quiet sort of strength, built largely on consistent improvements, ethical operations, and a dedication to technological progress. Its brand may not be a household name on the Google scale, but consumers may very well end up using 3M products when they buy Google's Android devices, and that's made possible (at least in part) by the device designers' belief that 3M will be the best component partner to help them build a great consumer device.
A number of companies with great brands also happen to pay out great dividends. 3M counts itself as a member of this elite group, but there are plenty of others you can add to your portfolio alongside it. The Fool's put together a free report with nine rock-solid dividend-paying stocks for you to consider, but it's only available for a limited time. Click here to find out more, at no cost.