MMM: 3M Buying Back Shares, But With What?

By William Trent, CFA of Stock Market Beat

Stock Market Beat Large Cap Watch List member 3M Company (MMM) announced a large share repurchase program yesterday:

3M today announced that its Board of Directors approved a new $7 billion two-year share repurchase authorization between Feb. 12, 2007, and Feb. 28, 2009, the largest in 3M’s history.”While our first priority remains investing for growth, returning cash to our shareholders remains an integral part of our strategy,” said George W. Buckley, 3M chairman, president and CEO. “The strength of our operations and our confidence in 3M’s future continue to afford us the flexibility to do both.”

During the calendar years 2004-2006, the company returned more than $10 billion in cash to shareholders through the combination of share repurchases and cash dividends.

The press release was mum on how, exactly, the company would pay for the shares. 3M has about $2 billion in cash on hand, and generated about $4 billion in operating cash flow in each of the last two years. However, replenishing equipment and making acquisitions ate up about $2 billion each year, while dividends eat up another $1-$1.5 billion. That leaves $0.5-$1.0 billion in cash flow each year for repurchases. Combined with existing cash, the company comes up about $3.5 billion short of the $7 billion they plan to buy back over the next two years.

So where will they come up with the money? By issuing debt, of course. (They could also defeat the purpose of the buybacks by issuing new shares, but we’ll assume for now that they aren’t pulling the switcheroo.) Indeed, total debt rose by $1.5 billion in 2006 as part of their return of “more than $10 billion in cash to shareholders” over the last two years.

Now, we aren’t criticizing debt per se, particularly at the low low interest rates companies can borrow today. If the company doesn’t borrow to buy its own shares, a private equity buyer may well come along and do the same thing anyway. Furthermore, 3M’s current debt load of $3.5 billion ($1.5 billion net of cash) is hardly budget busting against $21 billion of assets at book value and a $55 billion market cap. In fact, many would likely argue that a recapitalization from debt to equity is the wisest thing to do for 3M.

But you won’t, apparently, catch management saying that.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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