# 3M Co. (MMM)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

3M Co., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 12.42%
0 DPS01 5.44
1 DPS1 6.64 = 5.44 × (1 + 22.02%) 5.90
2 DPS2 7.88 = 6.64 × (1 + 18.72%) 6.24
3 DPS3 9.09 = 7.88 × (1 + 15.42%) 6.40
4 DPS4 10.20 = 9.09 × (1 + 12.12%) 6.38
5 DPS5 11.10 = 10.20 × (1 + 8.82%) 6.18
5 Terminal value (TV5) 335.25 = 11.10 × (1 + 8.82%) ÷ (12.42%8.82%) 186.73
Intrinsic value of 3M Co.’s common stock (per share) \$217.83
Current share price \$164.37

Based on: 10-K (filing date: 2019-02-07).

1 DPS0 = Sum of the last year dividends per share of 3M Co.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.17% Expected rate of return on market portfolio2 E(RM) 11.48% Systematic risk of 3M Co.’s common stock βMMM 1.10 Required rate of return on 3M Co.’s common stock3 rMMM 12.42%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rMMM = RF + βMMM [E(RM) – RF]
= 2.17% + 1.10 [11.48%2.17%]
= 12.42%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

3M Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared 3,193  2,803  2,678  1,913  2,297
Net income attributable to 3M 5,349  4,858  5,050  4,833  4,956
Net sales 32,765  31,657  30,109  30,274  31,821
Total assets 36,500  37,987  32,906  32,718  31,269
Total 3M Company shareholders’ equity 9,796  11,563  10,298  11,708  13,109
Financial Ratios
Retention rate1 0.40 0.42 0.47 0.60 0.54
Profit margin2 16.33% 15.35% 16.77% 15.96% 15.57%
Asset turnover3 0.90 0.83 0.92 0.93 1.02
Financial leverage4 3.73 3.29 3.20 2.79 2.39
Averages
Retention rate 0.49
Profit margin 16.00%
Asset turnover 0.92
Financial leverage 3.08

Dividend growth rate (g)5 22.02%

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

2018 Calculations

1 Retention rate = (Net income attributable to 3M – Dividends declared) ÷ Net income attributable to 3M
= (5,3493,193) ÷ 5,349 = 0.40

2 Profit margin = 100 × Net income attributable to 3M ÷ Net sales
= 100 × 5,349 ÷ 32,765 = 16.33%

3 Asset turnover = Net sales ÷ Total assets
= 32,765 ÷ 36,500 = 0.90

4 Financial leverage = Total assets ÷ Total 3M Company shareholders’ equity
= 36,500 ÷ 9,796 = 3.73

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.49 × 16.00% × 0.92 × 3.08 = 22.02%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$164.37 × 12.42% – \$5.44) ÷ (\$164.37 + \$5.44) = 8.82%

where:
P0 = current price of share of 3M Co.’s common stock
D0 = the last year dividends per share of 3M Co.’s common stock
r = required rate of return on 3M Co.’s common stock

#### Dividend growth rate (g) forecast

3M Co., H-model

Year Value gt
1 g1 22.02%
2 g2 18.72%
3 g3 15.42%
4 g4 12.12%
5 and thereafter g5 8.82%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 22.02% + (8.82%22.02%) × (2 – 1) ÷ (5 – 1) = 18.72%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 22.02% + (8.82%22.02%) × (3 – 1) ÷ (5 – 1) = 15.42%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 22.02% + (8.82%22.02%) × (4 – 1) ÷ (5 – 1) = 12.12%