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Why 3M Company’s Debt Is on an Upward Trend

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3M’s debt

3M Company’s (MMM) debt has been on the rise since 2012. At the end of 1Q17, the company’s debt was at $11.7 billion. Between 2012 and 1Q17, MMM’s debt almost doubled, growing at a CAGR (compound annual growth rate) of 17%. 

3M’s debt includes short-term debt, long-term debt, and current maturities of long-term debt.

3M’s debt saw a spike in its debt position from 2014 to 2015, mostly due to its issuance 1.8 billion euro in new debt in May 2015 and $1.5 billion in new debt in August 2015. However, since then, 3M’s debt has remained steady in the range of $11.7 billion.

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3M’s debt-to-equity

A company’s debt-to-equity ratio indicates the proportion of its debt that’s being used to finance its assets. At the end of 1Q17, MMM’s debt-to-equity ratio was 1.06x. Its peers General Electric (GE), Honeywell (HON), and Stanley Black & Decker (SWK) had debt-to-equity ratios of 1.73x, 0.60x, and 0.73x, respectively.

MMM’s debt-to-equity ratio is higher than the industry average of 0.86x. It’s lower than GE’s ratio, but it’s higher than HON’s and SWK’s.

Free cash flow

3M continues to generate strong free cash flow (or FCF). MMM’s FCF rose from $3.8 billion in 2012 to $5.2 billion in 2016, rising at a CAGR of 8.3%. However, MMM’s FCF was directed mostly toward dividend payments and share repurchases. It appears that for MMM, debt clearance isn’t a top priority, as a reduction in interest expenses would have only a marginally positive impact on its net income.

You can hold MMM indirectly by investing in the SPDR Dow Jones Industrial Average ETF (DIA), which has invested 6.8% of its portfolio in MMM as of July 3, 2017.

In the next article, we’ll look into MMM’s interest expense details and its ability to service its debt.

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