When a company with an iconic name like 3M (MMM -0.01%) is trading in the Wall Street dog house, it pays to at least take a look. Maybe you'll like what you see, maybe you won't, but it is better to know than look back and wish you had paid attention. Here's a quick overview of the good and bad with regard to 3M today.
Attractive dividend numbers
3M has increased its dividend annually for over six decades. That makes it a highly elite Dividend King. Adding to the allure, the stock's 5.8% dividend yield is at the high side of the company's historical yield range. In fact, the yield today is even higher than it was during the Great Recession. Add in slow and steady dividend growth, chiming in at more than 9% annualized over the past decade, and you can easily see why dividend investors would be interested in the stock right now.
Image source: Getty Images.
Looking to more traditional valuation metrics, like the price-to-earnings, price-to-sales, and price-to-book value ratios, 3M remains an attractive option. All three of these measures sit at around half of their five-year average levels. Before you pile in, however, know that Wall Street doesn't usually dump a stock like this without a good reason.
The dividend can help give a start in understanding what's going on. While the 10-year annualized dividend growth rate is nearly 10%, the figure has been falling. Over the past five years the average was just shy of 5%. Over the past three years the average was just a touch over 1%. And the most recent increase was a skinny 0.7%. Basically, 3M's business has been facing headwinds, with growth slowing to a crawl.
Easy versus hard
The most obvious issues facing the company today relate to inflationary cost pressures and the general ups and downs of its highly diversified business. While a deeper discussion of these headwinds could be had, they are really just part of any company doing business today. Given 3M's long history of success, it is reasonable to expect it to weather these problems well over time.
The bigger issue today is that 3M is facing legal and regulatory headwinds that aren't going to end quickly and they aren't going to be easy to solve. The biggest headline grabber of late has been lawsuits surrounding earplugs the company sold to the military. It has won some of these lawsuits and lost others, with 3M recently arguing that most of the plaintiffs don't actually have hearing loss at all. Still, the litigation is costly and isn't anywhere near over. If 3M loses, it could be a multibillion-dollar setback.
The industrial giant is also dealing with issues surrounding its production of so-called "forever chemicals." This involves expensive efforts to clean up contaminated environments and is likely to lead to years of litigation. The issues surrounding these chemicals have pushed management to phase out their production, which itself will result in costly write-downs. The process won't be complete until 2025, either, so there's still more to be done here before this exit is complete.
Adding to the complications, 3M is also looking to spin off its medical business. That has long been considered a growth platform, so the move to separate it may cause some concern. But, from another perspective, it would shield the business from legacy liabilities that are hampering the rest of the company's operations. Wall Street might afford the spinoff a higher price alone than it would as part of 3M. So this might actually be a rare bit of good news for shareholders, even though it adds more complexity to the story.
Not for the faint of heart
Given the long-term headwinds, 3M is not an appropriate stock for risk-averse investors. There are just too many company-specific issues. It might, however, make sense for more aggressive investors willing to bet that an investment-grade-rated company with a $50 billion market capitalization, even after massive stock declines, can handle some legal and regulatory pain. Indeed, stocks don't fall into deep value territory for no reason -- you just have to make sure you can stomach the uncertainty if you step in to buy them.
