3M’s Buyback Signals Strong Investment Opportunity

Michael Schoonover, COO & Portfolio Manager
Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC and Rational Advisors, Inc. and Portfolio Manager of a share buyback strategy fund at Catalyst Funds. He began his association with Catalyst in 2011 as a research consultant supporting the implementation and back testing of quantitative strategies. In March 2013, he became a senior analyst at Catalyst to provide investment research for several mutual funds. From 2005-2011, he served in various technical and scientific management roles with the Perrigo Company. Mr. Schoonover has an MBA with high distinction from the University of Michigan Ross School of Business and a BS from the University of Michigan.

MMM Announces $10 Billion Share Repurchase Program

On Wednesday after the market close, 3M Company (MMM) declared a quarterly dividend and announced the authorization of a $10 billion share repurchase program. As we previously discussed in our analysis of Berkshire Hathaway (BRK/A and BRK/B), seeking out the right share buybacks may allow investors to outperform. Like Berkshire, 3M’s announcement possesses the characteristics of a strong buyback strategy.

In our previous piece, we discussed that Warren Buffett’s philosophy is that the best use of cash is to repurchase stock if it is underpriced and there are no other valuable places to invest it.

Following previous buyback authorizations, 3M has had a strong track record of outperforming the S&P 500 TR Index. This indicates that 3M stock was underpriced when the company announced previous share repurchase programs, thus meeting Buffett’s first requirement for buybacks.

3M Co. has a strong track record of outperforming the S&P 500 TR Index following past buybacks

Aggregate returns as of November 15, 2018

Announcement Date Authorization Amount MMM S&P 500 TR MMM +/- S&P 500 TR
11/10/2003 $1.5 billion +276.5% +255.2% +21.3%
2/8/2011 $7 billion +177.9% +142.7% +35.2%
2/5/2013 $7.5 billion +132.5% +103.7% +28.8%
2/4/2014 $12 billion +82.1% +71.8% +10.4%
2/2/2016 $10 billion +48.5% +52.0% -3.5%
11/13/2018 $10 billion +3.3% +0.4% +2.9%

Source: Bloomberg LP

“The strength of 3M’s business model, which includes strong cash generation, enables us to consistently deploy capital in a way that creates the greatest value for our shareholders,” said Mike Roman, chief executive officer of 3M. “Our first priority remains investing in our business, and we will also continue to return significant cash to our shareholders.”

On Thursday, Mike Roman explained that the company plans to spend $2 billion in research and development, $1.7 billion to $2 billion in capital expenditures and $2 billion to $4 billion on gross share repurchases in 2019.

3M management seems to be following Buffett’s second criteria by only investing cash in buybacks when there is no other valuable place to invest in the business.

Furthermore, a few other factors indicate that this announcement may be a particularly meaningful signal. First, the timing of the buyback announcement has deviated from the past four announcements, which all occurred in February. Second, 3M has followed through on historical buybacks, with an average completion rate close to 80% (e.g., 3M repurchased about 80% of what they authorized). The previous two announcements had an average completion rate closer to 90%.

On the day following the buyback announcement, 3M provided earnings per share guidance for 2019 in the range of $10.60 to $11.05 versus the estimate of $10.80. 3M stock was up 3.43% on the news.