Has 3M Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if 3M (NYSE: MMM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at 3M.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.1% Fail
  1-Year Revenue Growth > 12% 7.8% Fail
Margins Gross Margin > 35% 47.0% Pass
  Net Margin > 15% 14.5% Fail
Balance Sheet Debt to Equity < 50% 31.1% Pass
  Current Ratio > 1.3 2.38 Pass
Opportunities Return on Equity > 15% 26.2% Pass
Valuation Normalized P/E < 20 15.48 Pass
Dividends Current Yield > 2% 2.9% Pass
  5-Year Dividend Growth > 10% 3.8% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at 3M last year, the company's score has dropped a couple of points. Flagging revenue growth and a reduction in net margins were responsible for the point losses, and the stock's price has dropped slightly in the past year.

Many investors who think of 3M mainly for its office products division are surprised to discover the true scope of its business. The company is responsible for making more than 50,000 products used by customers in a wide range of industries, including health care, construction, and transportation as well as its popular consumer goods. As a result, 3M is more directly comparable to General Electric (NYSE: GE  ) and its wide range of unrelated businesses than to competitors in any of the particular areas 3M serves.

Recent new initiatives highlight just how important business diversification is to 3M. The company is trying to help transform fuel infrastructure by working with Chesapeake Energy (NYSE: CHK  ) to develop a better fuel tank for compressed natural gas. It's also offering a cloud-based library that lets patrons check out e-books and even e-readers from certain libraries -- although Amazon.com (Nasdaq: AMZN  ) and its Kindle aren't part of the arrangement, at least for now.

Still, office products represent an important part of 3M's business, which is why it recently bought the office and consumer products division of rival Avery Dennison (NYSE: AVY  ) . The $550 million deal should give 3M an even wider reach in the space, allowing it to continue to come up with new innovations to drive growth.

3M's dividends are its greatest sign of its long-term success. With more than a half-century of rising annual dividends under its belt, 3M has weathered past storms in its business quite well.

For 3M to start moving in the right direction again, it needs to capitalize on growth opportunities and get margins back up to their previous levels. That's a tall order in a slowing global economy, but 3M has risen to the challenge before and could well do so again.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

3M isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add 3M to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of 3M, Chesapeake Energy, and Amazon.com, as well as creating a diagonal call position in 3M. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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