3M's Biggest Acquisition: Itself

When 3M's (NYSE:MMM) star CEO James McNerney headed to Boeing (NYSE:BA), investors got a bit spooked. When he was replaced, a lot of people suspected the company would go on a buying spree. At Brunswick (NYSE:BC), replacement 3M CEO George Buckley -- an engineering type -- had earned a reputation as an acquirer. 3M, of course, has always been a bit of an acquirer, anyway. That's why I think it's worth noting the company that's attracting the biggest gobs of 3M cash these days: 3M.

Today, 3M management noted that the board had authorized another $1 billion for share repurchases, since the company seems to have been pretty busy spending the last $2 billion over the past few months. That makes $3 billion for the period of Feb. 28, 2006 through the end of February 2007.

To give you an idea of the magnitude of these purchases, pull up the numbers and look at 3M's outside acquisition activity over the past few years. In 2005, in what was a pretty big year for acquisitions, 3M spent $1.3 billion (more than twice the previous two years' total tally).

Is that money well spent? As much as it pains me to parrot management proclamations, I'm going to have to say yes. Buckley's comments note that 3M commands high rates of return, and I think this table shows us the money.

Few businesses out there can boast those returns, especially businesses like 3M, whose products are ubiquitous, appearing everywhere from hospitals to the aisles of Best Buy (NYSE:BBY), Wal-Mart (NYSE:WMT), and even Home Depot (NYSE:HD). That's why I think it makes perfect sense for 3M to buy local these days. Compared to its historical self (by price-to-earnings or price-to-book), 3M is selling at a 20% to 30% discount. By my cash-flow model, I come up with the same range.

Of course, I share my colleague Stephen Simpson's concern that 3M needs to get its top-line growth moving. But like him, I'm also content to wait for it to happen, and I might even buy a few more stubs, should they continue to stay in this price range. I doubt 3M's revenue growth will be so sluggish forever, and with its enviable margin trend (see the chart below), I think it will continue to earn good returns for investors, even during the dry times.

There are no guarantees, of course, but when a company with a more than 30% return on equity and a more than 23% return on capital -- and 360 consecutive quarterly dividends under its belt -- plows nearly a year's worth of free cash flow back into itself at prices that look like a 30% off sale, I believe things will work out well for investors who are buying at the same levels. Time will tell.

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Seth Jayson wonders whether he can go a day without using a 3M product. At the time of publication, he had shares of 3M and Home Depot, but no positions in any other company mentioned. View his stock holdings and Fool profile here . Best Buy is a Motley Fool Stock Advisor pick. Fool rules are here .