3M (MMM), DuPont (DD), and Johnson & Johnson (JNJ) are “old” names on the cusp of rebirths; their fundamental stories are improving, yields are tasty, and total returns should outpace the broad market this year, suggests Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
3M
Admittedly, I was a bit surprised to find myself drawn to 3M. The stock really has not done much of anything in the last five years, the stock following a similar sluggard pattern of the company’s revenue line. However, there seems to be something stirring this behemoth.
For starters, the company’s vast operations represent a pretty good proxy for the overall economy, which means 3M’s prospects should improve as the “economic reopening” theme gains traction.
Second, cash flow trends have been very positive for the company. Improving cash flow provides ammunition for dividend increases, needle-moving acquisitions, and debt reduction.
Third, the company seems to be building operating momentum. Per-share profits in the fourth quarter of $2.38 handily beat the consensus analysts’ estimate of $2.15. Organic sales rose 5.5% during the quarter. The company saw across-the-board sales strength in segments and regions in the quarter.
Total sales grew 12.7% in Safety and Industrial, 10.6% in Consumer, 5.4% in Health Care, and 2.3% in Transportation and Electronics. Organic local-currency sales grew 7.9% in the Americas, 5.6% in Europe/Middle East/Africa, and 1.7% in Asia Pacific. Adjusted free cash flow was up 16% in the quarter. 3M is looking to build on the momentum in 2021.
The firm expects 5% to 8% total sales growth, organic sales growth of 3% to 6%, and per-share profits of $9.20 to $9.70 for 2021. The firm had profits of $8.74 in 2020. 3M recently raised its dividend nearly 1% to a quarterly rate of $1.48 per share.
I was a little disappointed in the magnitude of the hike, though the company is probably being conservative given the still-uncertain business conditions that linger with the pandemic. The dividend hike represents the 63rd consecutive year that 3M has increased its dividend. Yielding 3.4%, 3M offers an intriguing total-return package for 2021.
I do not see a ton of downside risk here — perhaps the $150s. And the stock traded for roughly $260 in 2018, so investors have shown some excitement for these shares in the past. I think a few more decent quarters will rejuvenate that excitement.
DuPont
A lot has happened to DuPont in recent years that investors may have missed. First, the company merged with Dow Chemical. It then split into three different companies (Dow, Corteva, and the “new” DuPont).
Then DuPont shed certain businesses, most recently its nutrition and biosciences unit. The end result is that DuPont is a specialty chemicals company, but a company you mention in the same breath as “smartphones” or “semiconductors.”
Indeed, nearly one-third of the company’s revenue comes from its electronics and imaging segment, which provides products for a number of fast-growing electronics markets. Organic sales in this segment jumped 8% in the fourth quarter.
The remainder of sales comes from the firm’s Transportation and Industrial unit and its Safety and Construction segment. Business here has been pressured to some extent by weakness in energy and aerospace markets. However, strength in residential housing has been a plus.
The company expects total revenue to jump in the 8% range in 2021, with per-share profits coming in at $3.30 to $3.45, up from $2.01 in 2020. I like companies “in motion,” and DuPont has definitely been in motion in recent years as it hones its operating segments.
I think the changes at the company are being overlooked by investors, which is why I think these shares have interesting upside potential. Providing a boost to total-return potential is the stock’s dividend yield of 1.7%.
Johnson & Johnson
Johnson & Johnson has been in the news as a result of its Covid vaccine. However, I think there is a lot more to the story than simply the vaccine. To be sure, I think Johnson & Johnson’s vaccine could be a surprisingly strong player in the space.
Yes, the initial reports showed lower efficacy than those of competing vaccines. However, the fact that the vaccine offers easier delivery and storage, as well as a single dose versus the two-dose regimen of competing vaccines, may increase its appeal, especially overseas.
But Covid is just part of the story. J&J’s fourth-quarter numbers were fairly healthy. Revenue rose 8%. The company’s medical-devices unit was a problem area, as the pandemic has caused medical procedures to be deferred. However, this business should improve in 2021. For 2021, the company is looking for sales growth in the range of 8% to 10% and per-share earnings growth of more than 17%.
Johnson & Johnson trades at 17 times the 2021 earnings estimate of $9.50. That seems a reasonable multiple to pay for an industry leader with “kicker” potential in its new Covid vaccine.
J&J has boosted its dividend annually for nearly 60 years, and I suspect the firm will increase the payout at least 4% by midyear. The current dividend yield is 2.5%. The stock is a classic “Steady Eddie” that should generate consistent returns for shareholders over the near and long term.
