3M stock provides a useful lesson into the sequence of how long-term investors sometimes generate their returns. It is interesting to me how there are certain stocks–particularly in the financial sector like Aflac, Morgan Stanley, and Bank of America–that keep growing earnings and pushing their intrinsic value higher each year, yet investors discard them because the price of the stock has not advanced in a manner consistent with the earnings growth.
Personally, those are the types of companies that I find to be the most straightforward candidates for investment because it is only a matter of “when” the investor community will recognize the improving fundamentals. Other value picks generally require improving business performance plus a recognition of that fact from investors that give it a higher stock price.
3M stock is a great illustration of this principle. In 2004, 3M stock hit a high of $90 per share after posting five year cumulative growth of 77% and brandishing a dividend growth stock streak that dates to the 1960s. Throughout its history, 3M stock has been about as blue chip as you could ask for, and has also delivered total returns that beat the S&P 500. 3M stock has compounded at 12.5% annually since 1980, 11% annually since 1990, and 11% annually since 2000. The terms of long-term investment in 3M stock have long been clear: You will get returns that beat the S&P 500 by about a percentage point or two over long periods, which can amount to substantial additional wealth compared to the index fund route.
3M stock has also treated investors well that desire a rising income stream to meet living expenses or make new investments, as the dividend has grown every year since the early 1960s and has grown from $1.24 in 2002 to $4.44 in 2016 for a 258% cumulative gain over the course of fourteen years, or 9.54% annualized.
Despite the fact that 3M has been a fantastic business just about any way you measure it, this does not mean that the performance of 3M stock has been as consistent as the long-term earnings growth and dividend growth indicates.
After hitting $90 per share in 2004, the price traded in the $80s and $90s through 2008, fell to $40 per share in 2009, and then traded in the $70s, $80s, and $90s through 2012. Most importantly, the bulk of 3M’s gains came in the year 2013 when the price of 3M stock appreciated from $94 per share to $140 per share. There was nothing extraordinary about 3M’s business performance in the year 2013–3M only grew earnings from $6.32 to $6.72, a little over 6%. But that was the year the price of the stock delivered 48% capital appreciation.
3M stock has been a real-life example of one of the most important stock market lessons to internalize–the smooth earnings growth of a consistently growing firm may deliver the bulk of its long-term returns in short, sporadic bursts that are not predictable. If you held 3M stock from 2004 through 2012, you were only collecting a dividend. Your 3M stock compounded at 2.90% annualized. But, if you held 3M stock from 2004 through today and captured that 48% capital appreciation in 2013, then you would have compounded your wealth at 9.24% annualized. There was a world of difference between holding 3M stock for eleven years instead of eight.
And here’s the kicker–with the exception of the 2008-2009 period when earnings shifted downward from $5.60 to $4.89, 3M stock grew its earnings during every year since 2004. 3M stock has paid out a growing dividend during each of these years. The profits were growing at over 9%, but you didn’t have the capital appreciation to show for it through 2012.
That is why I am not interested in market-timing strategies. It is very easy to see that 3M stock is a great long-term investment for someone that buys the stock and is truly committed to holding it for a long time. But I have no idea how you can predict the sequence of returns. There is nothing that happened to 3M’s core business in 2013 that would have indicated 2013 was the magic year for 3M stock to deliver capital appreciation.
This is also speaks to the merits of diversification and not over-obsessing on the performance of an individual stock in a portfolio. If you owned Visa, Nike, Becton Dickinson, Brown Forman, Disney, or another well-established large cap during the period leading through 2012, you could have been receiving large capital gains from them while 3M stock lagged. Then, over the past three years, 3M stock has been the leader of most portfolios.
Warren Buffett has been famous for saying that being a businessman has made him a better investor and being an investor has made him a better businessman. The spirit of that comment seems to apply to the relationship of an individual stock against the portfolio as a whole–the less you need a particular stock to deliver capital appreciation in a timely manner, the easier it is to actually wait out the periods of underperformance so that you can exercise the patience necessary to be a good investor.
I highlight the experience of 3M stock since 2004 because it is a more common occurrence than you’d initially think–I know I initially assumed that stocks with predictable earnings growth in the 8-10% range would loosely deliver capital gains in the 8-10% range. But that’s the case–even with exceptional investments like 3M stock, there can be years and years of nothing followed by a burst of capital appreciation.