Portfolio Update
The FiveTwenty portfolio received $65.42 dividends in the past week. K, MMM, and ORI, paid their quarterly dividends during the week.
| Past Week Dividend | $65.42 |
| Current Quarter Dividend (Q3 2021) | $515.13 |
| LifeTime Dividend | $1,020.47 |
| Estimated Annual Dividend | $2,766.19 |
The capital allocation for the week of 09/19/2021 to 09/25/2021 will be used to add to our position in 3M Co (NYSE: MMM)
MMM – Position Update
Since our last check-in on MMM in week 18 of 2021, the company reported Q2 2021 earnings on 07/27/2021. Additionally, the share price has fallen 7.9% from $197.14 to $181.49.
| TTM | Prev. Update | 10-year median | |
| Dividend Streak | 63 years | 63 years | |
| Yield | 3.26% | 2.97% | 2.49% |
| Payout Ratio | 58.21% | 60.10% | 54% |
| P/E | 17.85 | 20.31 | 19.84 |
Q2 2021 earnings report
Did MMM’s latest earnings report raise any warning flags?
MMM’s sales growth across all 4 segments for Q2 2021 compared to the same period a year ago was even stronger than in Q1 2021. Revenues grew 28.1% in Transportation and Electronics, 24.9% in Health Care, 22.4% in Safety and Industrial, and 20.4% in consumer. Overall, revenues grew 24.7%, net earnings increased 16.7%, and EPS were 15.9% higher compared to Q2 2020.
| Revenue (in millions) | Net Income (in millions) | EPS . | |
| Q2 2020 | $7,176 | $1,306 | $2.26 |
| Q2 2021 | $8,950 | $1,524 | $2.62 |
| % Change | 24.7% | 16.7% | 15.9% |
Additional noteworthy developments during the quarter:
- During Q2 2021, the company saw declines in demand for pandemic related disposable respiratory products and expects the trend to continue for the remainder of the year. At the same time volumes for health care elective procedures started improving.
- Semiconductor chip supply constraints continued to negatively effect electronics and automotive OEM production volumes. This is another trend expected to continue for the remainder of the year.
- MMM returned $1.4 billion to shareholders in the quarter, including $858 million in cash dividends and $503 million of share repurchases.
- On 09/13/2021, CFO Monish Patolawala warned that the continue semiconductor shortage and input costs increases outpacing the ability of the company to raise prices will impact MMM’s full year earnings on the high end of its $0.65-$0.80 per share range.
Looking ahead, the company updated full year 2021 guidance. EPS are now expected in the $9.70 to $10.10 range (previously $9.20 to $9.70) with full-year sales growth in the 7-10% range (previously 5-8%). It also now expects higher headwind from raw materials cost of $0.65-$0.80 per share (previously $0.30-$0.50).
Thesis
Why are we adding MMM to the FiveTwenty portfolio?
MMM has pasted very strong H1 2021 results. Top line revenue growth has so far outpaced earnings growth due to input costs raising faster than the company’s ability to raise prices for its products. However, we believe this to be a short term issue created by the ongoing COVID-19 pandemic and with operating margins >20% in all of its segments, MMM has the ability to weather the storm until inflation stabilizes.
At the same time the recent decline in share price has created an opportunity to add to our position at an attractive valuation and dividend yield.
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