3M (MMM 0.46%) has been viewed as a relatively safe investment for decades thanks to its steadily growing dividend and diversified business. But its share prices have fallen by 21.3% over the past decade as its growth has slowed and its margins have shrunk.
The question for investors today is whether this underperformance is an outlier or 3M's new normal.
3M's rapid downfall
There are several ways to look at 3M's decline over the past decade, but I want to start with the high-level numbers. Its revenue is up just 74% over the past 20 years, which is only slightly ahead of inflation, and net income and free cash flow haven't improved much either, even before their recent declines.
MMM Revenue (TTM) data by YCharts.
Given the complexity of 3M's business, there are many reasons for the decline, but its gross margins have been trending slowly downward for years, and operating income hasn't been growing either.
MMM Gross Profit Margin (Quarterly) data by YCharts.
Some of the pressure comes from more competitive global supply chains. A lack of innovative new products hasn't helped 3M either.
But I think a reduced level of supply power in the market needs to be at the top of investors' list of concerns. 3M used to be able to lean on big-box retailers to grow revenue (it also had growing electronics sales). These former macro tailwinds have become headwinds.
Now, its retail-facing businesses are struggling to compete with smaller suppliers that have built their operations on Shopify and market themselves using Facebook ads, which 3M has no expertise competing against. Manufacturers in China, India, and other low-labor-cost markets have copied many of 3M's products effectively enough to compete on price. That's hurting its bottom line.
Can 3M still innovate?
3M used to be known as an innovative company, but for two decades, it has been cutting its R&D spending as a percentage of revenue. R&D doesn't just make new products, it updates formulas for old products, develops adjacent product lines, and improves efficiency in manufacturing.
A lot of R&D spending is required just to keep existing products up to date, so if the R&D budget is being cut as a percentage of revenue, there's even less of it left than you might think to be used in the search for new innovations.
MMM Research and Development Expense (TTM) data by YCharts.
I think that's a big reason we haven't seen any completely new big, innovative products from 3M for years. The company is spending more time and energy on pursuing efficiency than it is on building new products. And that's how we got here.
Where does 3M go from here?
I don't see signs of a turnaround building anywhere in 3M's financials or culture. The company is a behemoth of industry and has solid cash flows, but it's largely using that money to pay dividends and service debt, not to grow the business.
MMM Free Cash Flow data by YCharts.
Shareholders may be in for another disappointing decade from 3M without major changes, and it's not clear where those changes would come from. The innovation and culture that made 3M what it was decades ago can't be recreated overnight. And many shareholders expect dividends. They are less enamored of spending on R&D, the payoffs for which are uncertain.
3M isn't the company it once was, and that's why it's not a stock I'm buying today.
