ST. PAUL, Minn. (
) -- Big companies that sell a range of products have a habit of performing much like the stock market as a whole.
Companies such as
post investment returns that closely track the
S&P 500 Index
over the long run. But divergence occurred during the tech bubble at the beginning of the decade and the credit bubble at the end, when the S&P 500 climbed faster than 3M. However, in both instances, 3M quickly caught up with the benchmark index. While many investors advocate holding an S&P 500-tracking exchange traded fund as a stable base for a portfolio, owning 3M may be a better starting point than the broader index, which has exposure to risky assets such as banks, insurers and carmakers.
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3M has six major divisions, each of which accounts for at least 11% of sales, but no division makes up more than 31%. An even spread among operations creates an environment in which the company isn't beholden to a single industry to sustain performance (much like the stock market).
The company sells almost everything, from Post-It notes to dog food to medical supplies. But it's not involved in finance -- to its advantage. Financing fueled earnings at many companies in the middle part of the decade, juicing the performance of fellow Dow component
by a massive amount. The recession and stock-market implosion has led to "normalized" operations, bringing leveraged high-flyers down to 3M's level. GE still hasn't recovered.
As investors fled risky assets as fast as possible, 3M became a refuge for some, leading to a share increase of 52% over the past year, double that of the S&P 500. With a dividend yield of 2.5%, parking cash in 3M is far more efficient that most alternatives, plus it gives investors the possibility of stock-market appreciation.
3M's operations resulted in a return on equity of 32% and, although debt makes up more than half of its capital structure, its financing costs are minuscule. An interest-coverage ratio of 27 shows the company can more than afford its leverage level.
It's unclear if financiers got the message that complex financial products and massive borrowing are bad ideas. Given that about 20% of the S&P 500 comprises financial stocks, the benchmark seems far more risky than it has in the past. Conservative investors concerned with capital preservation as much as appreciation, like retirees, should consider 3M to augment index funds to help shift portfolio weightings from more risky assets to ensure low volatility.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.