3M COMPANY $136 (New York symbol MMM; Conservative Growth and Income Portfolios, Manufacturing & Industry sector; Shares outstanding: 665.2 million; Market cap: $90.5 billion; Price-to-sales ratio: 3.0; Dividend yield: 2.5%; TSINetwork Rating: Above Average; www.3m.com) began operating as the Minnesota Mining & Manufacturing Company in 1902.

3M started off making sandpaper and abrasives for industrial customers. It later developed a variety of other consumer and manufacturing-related goods, such as pressure- sensitive masking and packaging tape, recording tape, reflective highway markings and medical bandages. The company now makes more than 55,000 different items.

The company owns a range of well-known brands, including Post-it notes, Scotch tape, Scotch-Brite household cleaning products, Scotchguard protection and Thinsulate insulation.

3M has five main business segments: industrial (which supplies 34% of its sales and 32% of its earnings), safety and graphics (18%, 18%), electronics and energy (17%, 14%) health care (17%, 23%) and consumer (14%, 13%).

3M has wide geographic diversification. Sales from outside the U.S. now accounts for two-thirds of its total, up from around half in 2000.

Strong rebound following downturn

The recession cut the company’s sales by 8.5%, from $25.3 billion in 2008 to $23.1 billion in 2009. However, sales quickly recovered to $26.7 billion in 2010, and rose to $29.9 billion in 2012. They could reach $31.0 billion in 2013.

Earnings fell 7.6%, from $4.89 a share (or a total of $3.5 billion) in 2008 to $4.52 a share (or $3.2 billion) in 2009. They turned around and improved to $5.75 a share (or $4.2 billion) in 2010, and $6.32 (or $4.4 billion) in 2012.

In the three months ended September 30, 2013, 3M’s earnings rose 5.9% to $1.23 billion from $1.16 billion a year earlier. Due to fewer shares outstanding, earnings per share gained 7.9%, to $1.78 from $1.65.

Sales in the quarter increased 5.6%, to a record $7.9 billion from $7.5 billion. If you exclude contributions from acquisitions and the negative impact of currency rates, sales would have increased 5.8%.

3M mainly grows by constantly developing new products. It spent $420 million (or 5.3% of its sales) on research in the latest quarter, up 5.8% from $397 million (or 5.3% of sales) a year earlier.

3M also grows through acquisitions. That adds risk, but the company typically targets smaller firms with unique technology that it can easily absorb.

Since 2010, 3M has spent $3.6 billion buying related companies. It has not had to write down any of the goodwill related to these purchases. (When one firm buys another for more than the book value of its land, equipment and other tangible assets, it treats the excess as goodwill.)

Big buy fitting in perfectly

The company’s biggest acquisition in the past few years was California-based Ceradyne, which it bought for $798 million in November 2012. Ceradyne makes advanced ceramics, which are stronger and more resistant to extreme temperatures than metals or plastics.

Ceradyne’s technology recently helped 3M develop a new, lighter combat helmet that offers 35% better protection against shrapnel than current models. In 2014, 3M will deliver 77,000 of these helmets to the U.S. Army and Marine Corps under an $80-million contract.

3M’s strong balance sheet will let it continue to develop new products and make acquisitions. Its longterm debt of $3.5 billion is a low 4% of its market cap, and it holds cash of $3.3 billion, or $4.92 a share.

The company is also an aggressive buyer of its own shares. In the first nine months of 2013, it spent $3.5 billion on buybacks, and it has $4.1 billion remaining on its current authorization. There is no time limit for these purchases.

In 2013, 3M’s earnings will likely rise 6.2%, to $6.71 a share. The stock has gained 47% in the past year, and now trades at a high 20.3 times our 2013 forecast. However, 3M’s 2014 earnings could rise to $7.43 a share. It trades at a more reasonable 18.3 times that estimate.

56 years of rising dividends

Thanks to its improving outlook, the company recently raised its quarterly dividend by 34.6%, to $0.855 a share from $0.635. The new annual rate of $3.42 yields 2.5%. 3M has paid dividends continuously for 97 years, and raised the rate every year for the past 56 years.

3M is a buy.