After long procrastination, I’ve finally decided to manage my kids tuition investment account (called an RESP in Canada). I have roughly $10,000 saved in this account and it was invested in mutual funds until recently. Over the past three years, I’ve crushed the fund managers performance and this is why I decided to take over. I then transferred the money into my brokerage account before the Holidays and waited…
It was good timing since the market has kept dropping since then. At the beginning of the year, I’ve finally re-entered into investing mode and checked out what kind of portfolio I wanted to manage for my kids. I have made my first purchase with 3M Co (MMM).
I purchased 13 shares of MMM
Yeah… 13 shares doesn’t seem like a lot of money, but at $140, that still makes nearly $2,000. Not to mention I have to convert my money from CAD to US to buy these shares. Still, I think it’s a very good investment when you look at the next 10 years.
3M produces products like Scotch tape, projector systems, Post-it notes, Tartan track, and Thinsulate. This is a conglomerate that produces products for many industries and for both personal and business use, and their manufacturing, research, and sales offices are all over the world.
The main reason why I purchased shares of this company is that it really is a money making machine. I can truly never look back at this investment and will wait until my kids hit University. I know my money will be wisely invested.
Investment Thesis
3M Company is definitely more diversified than a balanced mutual fund. It is present in various consumable product areas and the bulk of its sales come from business-to-business transactions. Roughly 50% of its products are consumable, which implies a very high rate of repeat business year after year. This makes it a great company to start a new portfolio.
The company also allocates between $1 and $2 billion per year for acquisitions providing external growth on top of what is coming out of its own R&D department. MMM also benefits from top-of-the-line technology enabling it to control costs like no other company.
Potential Risks
The fact MMM produces so many different products makes high digit growth difficult to generate. It is most likely to closely follow GDP growth instead of reaching high double digit figures. MMM has increased its sales throughout the world in the past decade. This makes the company more at risk from currency headwinds.
Valuation
The valuation process is always delicate. Many investors see MMM as fairly or overvalued. I think the opposite. I think that 3M is currently undervalued. A strong dollar negatively affected their numbers and the global economic slow down is nothing to help the stock value in the near term. However, if you look at the bigger picture and consider the true dividend growth machine this company has become, you get a different landscape.
| Calculated Intrinsic Value OUTPUT 15-Cell Matrix | |||
| Discount Rate (Horizontal) | |||
| Margin of Safety | 8.00% | 9.00% | 10.00% |
| 20% Premium | $382.39 | $241.12 | $175.29 |
| 10% Premium | $350.53 | $221.02 | $160.68 |
| Intrinsic Value | $318.66 | $200.93 | $146.08 |
| 10% Discount | $286.79 | $180.84 | $131.47 |
| 20% Discount | $254.93 | $160.74 | $116.86 |
source: Dividend Toolkit Excel Calculation Spreadsheet
According to my valuation process, MMM is greatly undervalued at the moment. This is mainly because my focus is on dividend growth and this is a company that can give me lots of it. I think this is the perfect start for my kid’s fund. I’ll update you in the upcoming weeks as I continue my purchases.
Nice purchase, Mike.
I dont know much about RESPs…its something that Ive been meaning to read about. Do you have to pay the dividend withholding taxes for US taxes in RESP accounts?
R2R
Yes, you do have to pay withholding tax on US stocks held inside an RESP
Erik is right, you have to pay the withholding tax. However, I think it’s the best solution as I can’t find a company as diversified as MMM on the Canadian market.