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3M Company's (MMM - Analyst Report) note issuance of up to $1.1 billion of unsecured debt was assigned an Aa2 rating by Moody's along with a stable outlook. Moody’s also assigned an Aa2 rating to the company’s refreshed medium-term note (MTN) program. The unsecured notes are split between maturities of 5 and 30 years.

Aa2 is an investment grade rating, indicating high quality obligations with very low credit risk. The ratings are consistent with 3M's current Aa2 senior unsecured rating and Aa2 unsecured MTN program rating.

Debt Position

Though 3M maintained that the funds will be used for general corporate purposes, Moody’s believes that a majority of the debt proceeds will be employed to term-out commercial paper borrowings of $452 million at the end of first-quarter 2014. The company also has notes worth €1.025 billion maturing in Jul 2014.

3M’s funding needs are expected to rise as it boosts dividends, steps up share repurchase program and increases the pace of acquisitions. In first-quarter 2014, the company bought back around $1.7 billion of shares and has nearly $10.6 billion remaining under its share repurchase authorization.

Including the new issuance, 3M’s total funded debt would approach $8.35 billion. The robust interest coverage ratio will retreat to some extent due to additional servicing costs on the incremental debt.

Funding needs after the first quarter stem from the company’s April acquisition of Treo Solutions, a data analytics and intelligence firm providing services to the healthcare industry.
 
Ratings Validation

The Aa2 senior unsecured debt rating reflects 3M's strong competitive position across an extensive range of markets, with robust operating profitability, stable free cash flow generation and a relatively conservative capital structure. The company’s broad spectrum of operations counteracts exposure to any particular industry, geography or business cycle, thus generating fairly stable revenues and cash flows.

3M has been conducting restructuring initiatives to transfer capital from low-prospect businesses to more lucrative opportunities, thus generating better return on capital. Furthermore, the company’s continued investment in research and development enables it to generate organic growth by innovating products and applications that capture premium pricing in early stages of their life-cycle. This enables the company to improve margins consistently and capitalize on its brand value.

Outlook

The rating was accompanied by a stable outlook, reflecting Moody's expectation of 3M to continue generating resilient levels of profitability and free cash flow across business cycles. However, potential headwinds like macroeconomic conditions, foreign currency risks and raw material costs might restrict margins.

3M currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry that are worth considering include Icahn Enterprises, L.P. (IEP), Noble Group Ltd. (NOBGY) and CLARCOR Inc. (CLC - Snapshot Report), each sporting a Zacks Rank #1 (Strong Buy).

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