3M’s (MMM) debt at the end of the first quarter was at an all-time high. Since 2012, its debt has grown significantly, from $6 billion to $15.7 billion at the end of Q1 2018. It has grown at a CAGR (compound annual growth rate) of 20%. Debt includes short-term borrowings, the current portion of long-term debt, and long-term debt.
3M’s increasing debt has had an adverse impact on its debt-to-equity ratio. Increasing interest rates and the decline in EBIT (earnings before interest and tax) indicate that the stress on 3M is increasing. We’ll look at 3M’s ability to service its debt and interest expense in the next part.
3M’s debt-to-equity ratio has grown from 0.35x in 2012 to 1.21x at the end of 2017. It further deteriorated to 1.43x at the end of Q1 2018. Its current debt-to-equity ratio is double the industry average of 0.72x. Its peers General Electric (GE), Honeywell (HON), and Stanley Black & Decker (SWK) have debt-to-equity ratios of 2.25x, 1.04x, and 0.51x, respectively. With the exception of GE, 3M has the highest debt-to-equity ratio among the selected peers.
Can 3M’s free cash flow help reduce its debt?
3M has a strong free cash flow. In the past three years, it has generated an average free cash flow of $4.9 billion. However, its free cash flow has been mainly used to pay dividends and share repurchases, leaving little for other purposes. In 2017, 3M gave shareholders in excess of its free cash flow. It could look to divert some of its free cash flow and use it to repay the debt that could result in the reduction of interest expenses and improve its net income.
In the next part, we’ll look at 3M’s interest expense and its ability to service its debt.
You can hold MMM indirectly by investing in the SPDR Dow Jones Industrial Average ETF (DIA), which has invested 5.4% of its portfolio in MMM as of June 25.