Tuesday, June 25, 2013

Trees, Mass Destructed, Masks and Madness - 3M

Last week was hell week in Singapore.

For the global folks who are uninformed, Indonesia burned down Sumatra's virgin forests to make way for crop plantation and resulted in drastic air pollution as the haze from the smoke invaded half of South East Asia, with Singapore and West Malaysia most adversely affected.

For those of us in Singapore, it really felt like living in hell, right? We were breathing smoke, our clothes and food smelled like ashes and we were queuing to reincarnate. Well, fortunately (or maybe unfortunately) no, we were queuing to get 3M’s N95 masks that were supposed to help us breathe better in bad air.

But there weren’t enough to go around. We hear stories of how poor aunties queue for an hour at Guardian pharmacy only to find out that the inventory ran out. We then activated our friends overseas to bring masks back from all over the world. Masks were running out in Hong Kong, Taiwan and Australia. Air purifiers ran out too. Sharp’s ionizer sold so well that the stock actually bounced a bit. This Japanese firm did went to hell and came back.

So turning a threat into opportunity, I decided to revisit an old stock that I looked. I always liked to co. but somehow, never got a chance to own it. Yes, it’s 3M, the manufacturer of the all important N95 masks.

Since it has been years since I looked at 3M. I just want to share my process how I approach a stock analysis for the first time. As mentioned before, I ask 10 questions and try to answer them. Also, this would be a really prelim analysis. A deep dive analysis (like the one I did on Swatch which is still incomplete) should follow if you are really serious.

So here goes:

1. What is the Investment Thesis?

3M is a global industrial conglomerate founded on principles of science, imagination and innovation. It is a global niche leader in fields that it conducts its businesses and its products resonate quality assurance. 3M is a story about branding, innovation and shareholder return.

2. It is Cheap?

Sadly no.

3M trades at 16-18x PE (1 to 2 year forward) for an industrial company
4x Price to Book on ROE of 20+%
FCF yield 5% and Dividend of 2+%

Buy at $80, when it is 20% cheaper vs now at $108.

3. It is a Good Business, Good Franchise?

Hell, YES!

3M began operations as the Minnesota Mining and Manufacturing Company in 1902. The company started as a sandpaper manufacturer and later manufactured masking tape in 1925. Today 3M has over 55,000 products in six business segments. 3M is headquartered in St. Paul, Minnesota and has operations in more than 60 countries.

Some of its best well-known products include Post-It Notes, Scotch Tape (yes the brand became the product!), 3M Solar Film and Car Floor Mats and not forgetting N95 masks! It also has a huge array of products used in almost all aspects of our lives, just that we are not aware. This includes film used in our mobile phones, safety goggles, tapes, etc. You name it.

30% of 3M sales comes from new products which allow it to reset price points and capture customers’ time and mindshare.

3M also focuses only at the top of the pyramid high performance products to differentiate itself from the competition. Top tier products account for 50% of its sales.

15% Time: In 1948, 3M’s management introduced this concept that allows its staff to spend 15% of their time to do non-core related idea generation. Post-it notes and some products we see today were born from 15% Time. Today many innovating firms use the same concept to help foster innovation. For example: Google’s 60:30:10 concept.

4. How’s the Management?

3M’s management is very focused on shareholder return. It has been paying dividends and it regularly conducts share buybacks.

5. Does it have Strong Financials?

Here's a cheatsheet that I would often use as a first cut to look at the co. In short everything is in order.

6. Geographical and Industry Exposure?

30+% Sales to EM markets.

Quick Regional Operating Profit (OP) breakdown
Asia Pacific 41%
Europe, Middle East, Africa 19%
Latam, Canada 14%
US 26%

Segment OP breakdown and OP margin (2012 USD) Industrial 2.2bn 23%
Safety and Graphics 1.2bn 22%
Electronics and Energy 1.0bn 19%
Healthcare 1.6bn 32%
Consumer 0.9bn 22%
Others -0.6bn
Total 6.5bn 22%

7. Dividends?

3M is a Dividend Aristocrat ie it has been giving and increasing dividend for the past 40 years. This company has been giving dividend since Singapore was born. It’s current dividend yield is 2.4%.

8. Risks and Mitigators?

3M is very geared to the global economy. Weakness and slowdown has an amplified impact on 3M. During the Lehman GFC (Global Financial Crisis), 3M fell to a 10 year low of $40.

9. 2nd Level Thinking Angle?

In this kind of weak stock market and macro environment 3M is not on investors’ mind. But the stock has not corrected as much. This could be a reflection that the 3M brand is also growing stronger.

10. Can I Sleep Well at night holding this?

With the N95 mask on, maybe not. But no haze, Three Yes's!

Well that's that for 3M. Hope to do a really deep dive analysis in time. But this is a great stock and I do hope to have a chance to own it soon!

Friday, June 14, 2013

2013 High Dividend Stocks in Singapore - Part 2

This is a continuation of a previous post on dividends.

Finally, here is the long awaited part 2 of the list of high dividend stocks listed on Singapore's SGX.

The criteria/factors used to screen these names have not change much over the years. Although I did tweak the numbers eg. the cut off for dividend in the past could be 4-5% but now it's 3.5% bcos you won't find enough names using 4-5% dividend. If you study the previous lists carefully, you would also notice that about 20-30% of the names would be the same but their dividend yield should have gone down (ie prices have gone up). Having said that, being on the list too many times may not be a good thing, bcos it means the stock didn't do much over the past few years.

Here's the real kicker bonus: a not insignificant portion of the old names rallied way too much and hence dropped out. Some got taken out like Cerebos and Adampak. Now, we are talking about multiple baggers. That's where the real money was made! Of course there are also duds like Raffles Education, which I have warned could have serious issues. So again, this list is always just a starting point.

These are the factors used this time round. It is interesting to note that about half the names drop off after every criteria. From a start of 366 names, only 28 names remained.

This second half of names, in my opinion, contain some of the best run companies in Singapore. Veteran investors looking at Singapore stocks for some time would probably agree, mid caps like Sarin, Boardroom, CSE Global, Boustead are really companies run by some of the most competent business managers Singapore has seen. They have done us proud. Ok, one is an Israeli co. and the other is run by an angmo but never mind, they are listed on SGX and that's what counts! My favourite though, has always been Sembcorp Marine. Together with Keppel Corp, these two companies conquered the world of oil rigs with 60% worldwide market share. In no other industry does our small little red dot have such dominance in the global arena.

We are so good that Brazil, a country that is like 50x bigger, entrusted some of their most important national oil exploration projects to Sembcorp and Keppel. It is a strong vote of confidence in the capabilities of some of our finest. Every Singaporean should feel proud of Sembcorp and Keppel. Sembcorp Marine is also building the first world's largest dock capable of repairing and maintaining mega containerships and oil tankers. While the co. is now going through a bad patch with its rig tilting incident last year, I believe things would turn. The world is running out of oil and gas and it needs to keep exploring and drilling in deeper and deeper waters. That's playing to our rigbuilders' strengths.

Investing in some of these great Singapore co.s just adds so much more to the fun. It's like owning a piece of our heritage and feeling good and proud about it. Not to mention receiving the all important dividend every payable date. That's la vie est belle!

Again here is the past lists:
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Disclaimer: this blogger owns Sembcorp Marine.