Will 3M Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Contrary to popular notions, 3M (NYS: MMM) doesn't just make little yellow sticky pieces of paper. The company is a longtime innovator in a wide range of industries, making 3M a true conglomerate. But one of the hardest things for conglomerates to do is to keep their focus and maintain their growth. Does 3M have what it takes to stay on track? Below, we'll revisit how 3M does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at 3M.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$60.2 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years4 yearsPass
Stock stabilityBeta < 0.90.87Pass
 Worst loss in past five years no greater than 20%(29.8%)Fail
ValuationNormalized P/E < 1816.54Pass
DividendsCurrent yield > 2%2.7%Pass
 5-year dividend growth > 10%3.6%Fail
 Streak of dividend increases >= 10 years54 yearsPass
 Payout ratio < 75%36.3%Pass
    
 Total score 8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at 3M last year, the company has improved by a point. A cheaper valuation earns 3M a score of 8.

3M has more than 50,000 products under its belt, going well beyond its well-known office-supplies business to include products serving both the health care and transportation industries, among others. Demonstrating its flexible approach to doing business, one unique, high-profile job the company did was to create a digital billboard for Wynn Resorts (NAS: WYNN) , which cost $16 million but still stands out among competitors' offerings. 3M also has worldwide reach already, with about two-thirds of its revenue coming from international markets.

But despite its past success, 3M isn't resting on its laurels. Instead, it's seeking new initiatives going forward. The company recently announced a partnership with Chesapeake Energy (NYS: CHK) to promote compressed natural gas as an alternative fuel source by building lighter, stronger fuel tanks. In addition, 3M is buyingAvery Dennison's (NYS: AVY) consumer and office products division, boosting its presence in what many consider to be the company's core area.

For retirees and other conservative investors, a 54-year track record of increasing dividends looks mighty fine. But the company retains enough of its earnings that it has plenty of room to grow into promising niches. With the stock having disappointed investors in the past year, 3M is offering investors a chance to add the stock to their retirement portfolios at an attractive price.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add 3M to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and 3M, as well as creating a diagonal call position in 3M. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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