Patient dividend investors will often take the view to allow management of the companies in which they invest time to give up short-term yield when they can more effectively deploy capital across the group.
This is perhaps best reflected in the example of the 3M Corporation (MMM), the diversified industrial group which has according to a recent Bloomberg news report, has spent more than $2bn on acquisitions in 2010 diversifying its business and growing its income streams.
In its most recent deal, 3M (MMM) will pay $448 million to acquire Winterthur, which is a leading global supplier of precision grinding technology serving customers in the growing area of hard-to-grind precision applications in industrial, automotive, aircraft, and cutting tools.
What is important about this transaction is that management is obviously seeing a more positive economic outlook as they have now spent more on acquisitions in 2010 than in any other previous financial year. It is not just on acquisitions but also in research and development (R&D) where 3M (MMM) is investing.
Dividend investors might point to the 2.4% dividend yield on offer at 3M (MMM) as a detractor, but the reality is that management has been hard at work deploying capital at a time when they believe assets are cheap.
In his full year report back to shareholders CEO George Buckley said: "To me, a hugely important distinguishing factor of 2009 was this resolve to maintain investments in the future. We maintained investments of more than a billion dollars in R&D at a time when many companies were forced to dramatically cut back. And we still managed to achieve an impressive free cash flow conversion, about 126%, even with $900 million capital investment last yearend nearly $1.4 billion put into our pension and post retirement plans, the majority of which was cash."
The benefits of this strategy are perhaps best reflected in the earnings mix at 3M (MMM). Sales in emerging markets grew by 25 percent in the third quarter and now comprise 34% of 3M’s (MMM) worldwide sales. These include 48% in Korea, 39% in India, 32% in Russia which has recently won the rights to host 2018 World Cup and 31% in China.
This expansion into emerging markets has ensured the company retains its market leading position in a number of sectors which has translated into a strong cash position - about $4bn at the end of the last quarter.
A $10,000 investment in 3M (MMM) in December 2000 would now be worth $17517.69 excluding the re-investment of dividends. If you were picking up a dividend each year of 2.3% - and one which had grown every year for 52 years - and a 2-for-1 stock split in 2003 you would have come through an investment cycle comfortably ahead.
While dividends are an important aspect for shareholders to consider one shouldn't ignore the platform that 3M (MMM) management is laying.
Add your Comment
or use your BestCashCow account