Analyzing the Good and Bad of 3M: Is It a Good Investment?

25 Mar 2023

When a company as renowned as 3M encounters difficulties, it's important to take a closer look at what's happening and why. While you may discover good news, there's also a chance you won't, but it's better to stay informed than to regret not paying attention. So, let's examine both the positive and negative aspects of 3M today.

On the bright side, 3M has been increasing its dividend for more than six decades, making it one of the elite dividend kings. Additionally, the company's dividend yield of 5.8% is currently on the higher end of its historical range, which is a considerable draw for dividend investors. Moreover, with a consistent dividend growth rate of over 9% year-over-year for the past decade, it's easy to see why people might be interested in investing in the company's stock right now.

In terms of traditional valuation metrics like price-to-earnings, price-to-sales, and price-to-book value, 3M remains an attractive investment option. All three metrics are hovering around their five-year averages, making the company a tempting investment opportunity. However, it's important to note that Wall Street rarely shorts stocks without a good reason.

Dividends can also help provide insight into the company's performance. While the 10-year annual dividend growth rate for 3M is almost 10%, it's been declining in recent years. The average growth rate for the past five years has been just under 5%, with the average for the last three years being slightly over 1%. Furthermore, the most recent dividend increase was only 0.7%. This suggests that 3M's business has encountered adversity, and growth has slowed down.

The most significant challenge 3M currently faces is legal and regulatory issues that won't be easily resolved. The most high-profile legal issue involves lawsuits related to earplugs sold to the military, with the company winning some cases and losing others. Recently, 3M has claimed that most of the plaintiffs aren't actually suffering from hearing loss. However, the lawsuit is expensive and likely to continue for some time. If 3M loses, the defeat could result in multi-billion dollar damages.

Additionally, 3M is facing problems associated with producing "everlasting chemicals," which require costly efforts to clean up contaminated environments and may lead to years of litigation. The company plans to phase out production of these chemicals by 2025, which will result in expensive write-offs. This process will be challenging and costly.

To make things even more complicated, 3M is planning to separate its medical business, which has long been viewed as a growth platform. Although this move may cause some concern, it would protect the business from liabilities that could impact the rest of the company's operations. Separating the medical business could also result in a higher price from Wall Street than if it were part of 3M. While this could be good news for shareholders, it does add complexity to the situation.

Considering the long-term challenges 3M faces, it may not be a suitable investment for risk-averse investors due to the numerous company-specific concerns. However, it may make sense for more aggressive investors willing to take a bet on a company with an investment grade and a market capitalization of $50 billion, despite significant stock declines and legal and regulatory issues. Stocks don't enter the deep value zone for no reason, but investors must be prepared to weather the uncertainty if they decide to invest.