Portfolio update – DuPont disposal & 3M purchase
Update on the latest changes to the Global Income & Growth Fund…
During January we initiated a position in 3M in the TB Saracen Global Income & Growth fund. We had looked at 3M in the past but preferred to hold on to our position in DuPont where we saw value creation from the spin-off of various divisions. The latest was Nutrition & Bioscience, which merged with IFF at the end of January. In the run up to this, DuPont shares saw a strong rise (+17% in the first two weeks of the year). It reached valuation levels which we thought were not justifiable anymore, namely 31x 2021 PE with a dividend yield below 1.5%.
It was time for us to dust down our 3M template.
3M is a direct competitor to DuPont in many areas like automotive, electronics and construction. What has drawn us to 3M is the strong margin profile, cash generation, return on invested capital (close to 20%) and an uninterrupted 62-year history of dividend growth. Combined with its leading position in its fields and high investments in R&D (6% of sales) and capex (5% of sales), 3M attracted a premium to peers in the past.
However, this has evaporated in recent months. The rational in the market was that it had done better during 2020 than in previous downturns and would therefore not see the usual early cycle rebound in 2021. We disagree. The main reason it has outperformed peers operationally during the pandemic is the strong demand for its face masks. The company also managed to cut costs further than expected. Going forward, we would expect areas not exposed to face masks to recover meaningfully as economic growth picks up. We have already seen good signs of improvement in the auto aftermarket and home improvement areas as well as tentative signs in elective surgery. Additionally, we expect demand for face coverings to remain high for at least another year. Many of the cost savings will be recurring and we expect margins to further improve, moving 3M well ahead of DuPont and other diversified chemical companies.
In short, we expect 3M’s operational performance to pick up during 2021 and 2022. We also expect the shares to close the discount to their peer group. Below 17x 2021 PE and with a 3.4% yield we saw a great entry point into this high-quality name. We sold our holding in DuPont to finance the purchase.
Graham Campbell (firstname.lastname@example.org)
Bettina Edmondston (email@example.com)
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