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3M’s Free Cash Flow Could Help Its Debt Reduction

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3M’s free cash flow

Previously in this series, we discussed 3M’s (MMM) debt position and its ability to service its debt. In this part, we’ll see if 3M’s free cash flow can help reduce its debt more. 3M has been generating positive free cash flows. If we consider data from the past six years, 3M has managed to generate an average free cash flow of $4.7 billion between 2012 to 2017.

3M’s strong free cash flow is mainly used to pay cash dividends to its shareholders. In the past six years, 3M has used an average of 48% of its free cash flows to pay dividends. 3M has still left more than 40% of its free cash flows for other financial activities. 3M has the ability to redeem its bonds early and reduce its debt. Currently, 3M appears to have given share repurchases more priority than reducing its debt. The company’s objective is to accommodate dividend growth and boost its EPS growth.

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Peer comparison

3M’s free cash flow has grown at an average of 4.2% between 2012 to 2017. In contrast, Honeywell (HON), Stanley Black & Decker (SWK), and Boeing (BA) have average free cash flow growth of 16.4%, 11.3%, and 38.4%, respectively. Although 3M’s free cash flow growth is lower than its peers, it has remained consistent.

To hold 3M indirectly, investors could invest in the iShares Global Industrials ETF  (EXI), which has invested 2.7% of its portfolio in 3M as of September 26.

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