Why This 3M Buyback Is So Impressive

This buyback is open-ended, so it has no expiration date, nor any formal guidance on how it will be enacted. It is just not clear how long it would take to buy in $12 billion in stock. The history shows that 3M spent $5.2 billion on buybacks in 2013, up from $2.2 billion in 2012. At the same pace as before, it could take as little as two years or as many as six years.

That assumes the dividend remains steady. 3M boosted its dividend to $0.855 per share starting in January from $0.635. Paying at the new dividend rate would mean spending an extra $145 million a quarter.

A second issue is how the buyback will be financed. 3M’s announcement did not say. The conglomerate had roughly $8 billion in cash and equivalents at the end of the fourth quarter. 3M reported free cash flow of $4.1 billion. 3M defines free cash flow as cash from operating activities less purchases of plant, property and equipment. The company also invested $1.6 billion in new plant, property and equipment in 2013.

So buying the shares at a rate of, say, $2 billion a year could easily by financed from existing funds — if all the cash for the buyback is domiciled in the United States. Large companies like 3M keep large amounts of foreign-earned cash outside the United States to avoid extra taxes.

What makes this buyback impressive is that the $84 billion market implies that almost 15% of its float will be acquired. Institutions own close to 71% of the float.

The announcement of the open-ended plan pushed the stock up after hours Tuesday to as high as $130.20. On Wednesday, however, the stock was down 79 cents to $125.92 early in the day with a weak stock market. The stock has suffered this year, falling more than 10%. In 2013, the shares soared 51%.

It is worth noting that 3M shares have also now pulled back 10% from its high of $140.43.