3M COMPANY $74 (New York symbol MMM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 698.3 million; Market cap: $51.7 billion; Price-to-sales ratio: 2.3; WSSF Rating: Above Average) is a diversified manufacturing firm. The company was formerly known as Minnesota Mining & Manufacturing.

3M owns a large number of well-known brands. Post-it notes, Scotch tape, Scotch-Brite household-cleaning products, Scotchguard protection and Thinsulate insulation are just a few.

The company has six business segments. These are the industrial and transportation division, which supplies roughly 31% of 3M’s sales and 29% of its profits, health care (17%, 23%), safety, security and protection (14%, 14%), consumer and office (14%, 13%), display and graphics (13%, 11%), and electronics and communications (11%, 10%).

This broad product base cuts 3M’s reliance on a single industry or customer. The company is also geographically diversified: 3M sells its products in over 60 countries, and sales from outside of the U.S. account for about two-thirds of its total sales.

3M’s sales rose 26.3%, from $20.0 billion in 2004 to $25.3 billion in 2008. Acquisitions were part of the reason for the gain. 3M tends to buy smaller companies with unique technologies that complement its businesses. Smaller companies are also easier to absorb. This limits the risk of unpleasant surprises. Earnings rose from $3.75 a share (or a total of $2.8 billion) in 2004 to $5.60 a share (or $4.1 billion) in 2007. In 2008, the company’s earnings fell to $4.89 a share (or $3.5 billion).

Severance costs were the main reason for the earnings drop. In response to the recession, 3M began a restructuring that included cutting 4,500 jobs, or 6% of its workforce. Without these costs, earnings per share would have risen by 3.8%, to $5.17 from $4.98 in the prior year. The restructuring should lower 3M’s annual costs by $235 million, starting this year.

These savings will let 3M maintain its high research spending. The company spent $1.4 billion (or 5.6% of its sales) on research in 2008. That’s up 2.6% from $1.37 billion (or 5.6% of sales) in 2007.

Research fuels long-term growth

The company has a long history of developing innovative products that quickly become market leaders. For example, it recently launched a new stethoscope that uses Bluetooth technology to wirelessly transmit heart, lung and other body sounds. By cutting down on ambient noise, the stethoscope will help doctors improve the accuracy of their diagnoses.

3M’s research should also help it profit from rising demand for better air and water quality. The company makes a variety of filtering systems for businesses and consumers. These products’ sales should improve as new housing construction rebounds.

The company is also helping governments around the world prepare for the spread of the H1N1 virus, commonly called “swine flu.” Since the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, 3M has increased its capacity to make respirator masks at plants in the U.S., U.K., Russia, China and South Korea. These investments should help 3M meet an expected jump in demand.

3M is also in a strong position to gain from greater use of liquid-crystal display (LCD) computer monitors and televisions. 3M’s display technology uses less power than that of its competitors. This should give it an advantage among increasingly cost-conscious consumers. Many LCD screen makers are already using 3M’s technology in their products.

Renewable energy has big potential

The company also has high hopes for its renewable-energy products. 3M makes a variety of components for solar-panel manufacturers. It also makes components and products that improve the performance and reliability of wind-power equipment, such as turbine blades and towers.

Demand for solar and wind-related products should continue to rise, particularly if the U.S. Congress passes a “cap-and-trade” bill that aims to limit emissions of carbon dioxide and other greenhouse gases.

3M’s $5.2 billion long-term debt is a low 10% of its market cap. It holds cash of $3 billion, or $4.26 a share. That gives it plenty of room to spend more on developing new products.

In February 2007, the company’s directors approved a plan to repurchase $7 billion worth of 3M’s shares. But to conserve cash in the face of weakening sales, 3M halted these buybacks in early 2009. The company still has $2.6 billion remaining under this authorization.

51 years of dividend increases

Halting share buybacks also freed up cash for dividend payments. Earlier this year, 3M increased its dividend by 2%. The new rate of $2.04 yields 2.8%. This is the 51st consecutive year that 3M has raised its dividend.

3M’s stock climbed as high as $97 in 2007, but fell to $41 in March. It now trades at 17.5 times the $4.22 a share that the company will likely earn this year. That’s reasonable in light of 3M’s broad product line and wide geographic presence.

3M is a buy.