I recall the annual report of eBay stock several years when the company still owned Paypal. I was struck by the fact that this not-so-little subsidiary was sitting inside the eBay corporate umbrella growing profits at a rate of 18% annually. Ebay.com was growing at a double-digit 13% rate, and was priced at a low valuation presumably because investors feared that Amazon would steal, rather than complement, eBay’s share of the online buy/sell market.
Then, in July 2015, eBay actually spun off PayPal at a price of $35 per share. Just four years later, the original eBay investors own eBay shares that have increased in value from $22 per share to $36 per share (not including dividends) and also own Paypal shares that have increased in value from $35 to $109 per share. One share of Paypal was issued for one share of Ebay per the terms of the spinoff, so one $22 share of Ebay became $145 in market value over the past four years due to the growth of Paypal.
While the Paypal spin-off was unusually successful due to its high earnings per share growth rate, I remain vigilant for companies that own a broad array of assets that are not fully realized in the market price and will either someday provide independent value as a separately spun-off publicly traded company or will increasingly contribute to the success of the parent company.
I have attached a copy of 3M’s business lines from page 72 of the most recent annual report.
As you can see, the business lines are incredibly diversified. There are industrial business lines, safety and graphics business lines, health-care business lines, electronics and energy business lines, and consumer business lines. That is an incredible collection of assets.
If they are ever broken up, you will find yourself owning stock in a lot of independently successful companies and could find a lot of wealth created in a short amount of time. To the extent that they remain together, hey, the dividend has gone up for 60 straight years, the total returns have been almost 14% annualized since 1959, and the CEO of the company has said that he expects 11-13% annual earnings per share growth from 2019 through 2023. It’s been a dream investment.
In particular, I have my eyes on 3M’s fast-growing “Personal Safety” business segment in its Safety and Graphics business group, which has grown over 40% over the past two years (from $2.5 billion in sales to almost $3.7 billion in sales). If that entity were ever spun-off, it would be similar to Abbvie being spun off from Abbott Labs where a moderate-growing parent company was shedding its faster growth pharmaceutical division.
Personally, I prefer that 3M keep the business conglomerate unified. There aren’t that many places where, say, a retiree can make an investment and stick the funds in the proverbial lock-box and not worry about it as they go through life. The list is maybe down to a dozen or so clear names. And 3M is one of them. With Honeywell splitting up, GE spinoff of its healthcare subsidiary, and Siemens coming attached with the additional German tax, 3M might be the last great American industrial conglomerate.
If someone told me that the Great Depression were to arrive tomorrow, and I had sum of capital that had to be distributed among twenty businesses, 3M would get one of the twenty spots. That is how highly I think of the strength and safety of 3M’s operating units.
The only reason I speak of a potential spinoff is because 3M is consolidating the way it reports on these segments, which can often be a precursor to M&A or divestment activities. And finally, most industries tend to engage in copy-cat behaviors more than they like to acknowledge, and with Emerson Electric, General Electric, and Honeywell all engaging in divestments either in the recent past or near future, it would not be surprising to see 3M do what its peers do (even though I believe it would be a mistake to unravel one of the few true fortress companies left in the United States).
The nice thing about finding these companies with multiple subsidiaries is that you can read the annual report and find business lines that are completely neglected from the analyst’s point of view and thus representing compelling value if “unlocked.” Alternatively, and perhaps superiorly, it can let you sleep better at night if you are buying stock in a company that has cash being sent to its headquarters from dozens of business units with strong competitive positions and sterling historical records of growth.
I know conglomerate’s are out-of-favor because investors can more easily value two sources of $50 profit rather than twenty sources of $5 profits, but my preferred response is to focus on those conglomerates like 3M where nearly all business segments have strong competitive advantages that result in investors experiencing ever-growing profits and dividends per share over almost every annual time period.