It's not flashy. It's not supposed to be. Like the great offensive lineman no team can do without but few fans have ever heard of, the right stock for the foundation of your well-diversified portfolio isn't glamorous. Investors need a company to make all the right moves at all the right times, to effectively weather the ups and downs of the market. For that, there's 3M (NYSE: MMM). It's the right company, for all the right reasons.
What to look for in a foundation stock
Stability is the key component of any stock chosen to anchor your portfolio. Of course stability is relative, particularly with the market conditions we've seen globally over the last several years. Still, relative stability beats wild fluctuations any day of the week. A quick, easy measure of volatility is beta, which measures a stock's movement relative to the ups and downs of its particular benchmark, like the S&P 500 or the Russell 2000 indices.
As a member of the Dow Jones Industrial Average, 3M is a diversified manufacturer with a $61 billion market capitalization. Not surprisingly, 3M's beta reflects a stable stock at only 0.8. Large, proven businesses with steady demand are important considerations when researching the right foundation stock.
Another important factor, in my opinion, is a respectable, consistent dividend-paying history, and once again 3M comes up big. In an article earlier this year, Fool writer Brian Richards points out 3M's amazing track record, alongside several other dividend-paying monsters). When 3M upped its dividend in February to what is now a 2.66% yield, it completed 54 straight years of increasing shareholder payments.
The value of diversification
3M's first-quarter results highlight one of the key reasons it's an ideal foundation stock. As one of America's true conglomerates, 3M has its fingers in a lot of different pies. As Q1 demonstrated, all those pies make up a suite of diversified revenue streams that help guard against downturns in any one segment or market.
3M stretches across six different business segments, including industrial and transportation, health care, safety, security and protection, display and graphics, and electro and communications segments. Oh, and who could forget the one we're all probably familiar with as the maker Scotch Tape and Post-It Notes, consumer and office.
Of the six segments, electro and communications, in addition to display and graphics both underperformed, down 3.4% and 11.8% respectively, year over year. Well, that's not good, right?
Thankfully 3M's other business segments performed admirably, led by industrial and transportation's $2.7 billion in revenue, up 8.6% over Q1 of 2011. As a player in the automotive OEM market, this segment in particular is poised to benefit from what has already been a strong 2012 for the automotive industry.
When Q1 was all said and done, 3M saw an increase of 2.4% year over year in revenues, a 6.7% jump in earnings, and improved operating margins. Tough couple of segments? Not to worry. Just like your portfolio, 3M is well-diversified, and shareholders benefit.
The slow, steady growth in share price of 8.74% so far this year is just what you'd hope to see from your portfolio stalwart. Toss in a nice, consistent dividend, and 3M's had a stellar year in what has been tough going for a lot of companies.
Though it can be tough to compare 3M with others because of the aforementioned diversified business segments, the few others that play in 3M's sandboxes can't quite stack up. Johnson & Johnson (NYSE: JNJ) is the big boy on the health care block, and is reasonably valued by a number of measures. Price to book and price to sales are both comparable to 3M, though Johnson & Johnson's margins are higher. Overall, Johnson & Johnson's leadership seems shakier in recent years, which is one reason I would opt for 3M at the current price.
General Electric (NYSE: GE) is another competitor, at least in one or two key business lines including display and graphics (electronics) and 3M's largest segment, industrial and transportation. Like Johnson & Johnson, GE's valuation appears similarly attractive. However, in my opinion, both stocks lack what only 3M can bring to the table -- a diversified line of revenue streams to protect investors from one or two downtrodden sectors.
Buying into 3M before its earnings call on July 26th may be concerning for some, since they could fall just short of market expectations. It's important to remember, however, to invest in 3M as the basis for your long-term portfolio, not for short-term pops. Save the volatile, rapid-fire growth stories for the water cooler at work.
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