The markets have been range bound for quite a while. Small caps have been the predominant investment for equity investors. That may be changing as the economy begins to slow. Investors are now asking what kind of stocks they should own in a slower growth environment.
As investors re-evaluate their risk positions, they should look for a stock that has some solid characteristics: high quality, strong balance sheet, above average dividend, solid earnings growth, outstanding returns on capital and strong free cash flow. One company that fits that profile is 3M (MMM).
In July, MMM released disappointing second quarter earnings that forced a stock sell-off from a high of around $81 down to approximately $68. Its problems should be short-term in nature and the price dip has created an opportunity to buy a high quality company at discounted prices. Even with the recent downward revision to earnings, MMM will grow earnings in 2006 by 9% and 11.4% in 2007 to $4.49/share and $5.00/share, respectively.
On top of this, investors can own shares in MMM and receive a 2.5% dividend yield. The dividend should continue to grow as MMM has over $1 billion in free cash flow. Bolstering that strong cash flow is an equally strong balance sheet with debt/equity of 0.24. Despite moderate leverage MMM also produces returns on equity in excess of 30%.
This growth is expected to continue as MMM's fastest growing businesses also doubles as it's highest margin businesses. Growth, cash and a handsome yield will serve investors well in an uncertain market.