Could 3M’s Free Cash Flow Help Improve the Funding Ratio?



3M’s free cash flow

3M (MMM) is one of the companies that has been generating a constant FCF (free cash flow) for a period of time. The quantum of the FCF generated by 3M in the past six years was an average of $4.7 billion, which indicates that 3M’s FCF is very strong.

However, a significant portion of 3M’s FCF is used to reward shareholders in the form of dividends and share buybacks. In the past six years, 3M has used ~48% of its FCF to distribute dividends to its shareholders. 3M has been using the remaining 52% of the FCF to buy back its outstanding common shares. In the past five years, 3M has repurchased ~$22 billion worth of common stock.

With a significant portion of 3M’s FCF going towards shareholders, there’s little scope for 3M to divert its FCF to other financial activities. If 3M manages to divert some of its FCF towards pensions, the company’s funding ratio could improve significantly.

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Peer comparison

3M’s FCF grew at an average of 4.2% between 2012 to 2017. In contrast, 3M’s peers Boeing (BA), Honeywell (HON), and Stanley Black & Decker (SWK) have average FCF growth of 38.4%, 16.4%, and 11.3%, respectively. Although 3M’s peers have higher average FCF growth, 3M has been consistently generating FCF of more than $4.5 billion in the past five years.

To hold 3M indirectly, investors could invest in the iShares Global Industrials ETF (EXI), which has invested 2.8% of its portfolio in 3M as of October 9.


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