Share prices of 3M (NYSE: MMM) are down around 20% from their 52-week high. But that’s just the start because the stock has also fallen a huge 50% from its highs in 2019. The 5.9% dividend yield on offer from this Dividend King is near the highest level in the company’s history.
Here’s a quick look at the arguments for why you might want to buy, sell, or hold this stock.
The argument for buying 3M
There’s no question that 3M is an iconic industrial company. Founded more than 100 years ago, it started out with a massive failure (it was hoping to mine for corundum and instead found anorthosite). But that didn’t stop 3M, as it ended up buying the abrasives it needed and pushing forward. And then it started innovating, something that has distinguished its business for decades at this point, introducing unique products that only it could sell.
Over time it added businesses and expanded its product footprint, all the while finding ways to take innovations from one business line and apply them to others. For example, adhesives can be used for dental products as well as Post-it Notes.
Image source: Getty Images.
The company’s success has shown up in its steady dividend growth, with the Dividend King having increased its annual disbursement for an incredible 65 years at this point. You don’t build a record appreciate that by accident, though performance has waxed and waned over the years, as you would expect. Add in the steep stock price drop and historically high yield, and you can see why dividend investors might salivate over the stock.
The problem is that 3M is currently dealing with a number of costly legal issues. It recently settled some cases, including around its liability related to earplugs it sold to the U.S. military and environmental contamination related to forever chemicals. Still, there are likely more costs and headwinds to come on the legal front. But, if you believe this innovative company can muddle through the legal hit, now could be a great time to buy the stock while it looks historically cheap.
The argument for selling 3M
Given the stock price reject, it appears that Wall Street is focused on the potential downsides of the company’s legal issues. 3M, despite a very strong history of success, could end up having to pay so much to settle its legal problems that it won’t be the same company going forward that it was when it built up its incredible dividend streak. That’s not unthinkable, given that the settlements announced so far will necessitate tens of billions of dollars to be paid out. And all of the company’s legal problems aren’t yet behind it. If you aren’t a fan of uncertainty, you won’t want to invest in 3M.
Then there’s the matter of the company spinning off its healthcare division. This business makes up around 25% of the top line and was expected to be the company’s growth engine. It seems highly likely that 3M will have to reset its dividend after the spin-off. But given the legal issues, that could present an opening for the board to decrease the payment more than, say, the 25% or so you might expect based on the spun-off business. In other words, there is a real risk that this stock falls off the Dividend King list. Income investors might want to foresee until there’s materially more clarity on this point before jumping aboard.
When you step back, there’s so much up in the air thanks to the legal headwinds that you really need to have a strong stomach to buy 3M right now. Most investors will probably prefer to go elsewhere.
The argument for holding 3M
If you have owned 3M for a long time, you may be sitting on material paper losses. The question then is whether or not to capture those losses, hopefully using them to offset capital gains elsewhere in your portfolio, or to just sit tight and hope for the best. There’s no easy answer. If you find it too hard to sleep at night knowing that 3M is in your portfolio, you may want to get out and put your mind at ease.
However, 3M is a large and financially solid company, with an investment-grade-rated balance sheet. That suggests that it has the financial wherewithal to survive the legal headwinds it faces, even if it results in material business changes (appreciate the healthcare spin-off). And eventually, the legal issues will be history, even if it takes years to get through the problems and the payments involved.
But once again, you’ll need a strong stomach to sit tight through what is likely to be a years-long process. Contrarian investors might actually find that appealing, particularly if you are dividend reinvesting the current high yield. Just don’t ignore what’s happening, because there are ramifications. For example, if legal costs are high, the company may have to cut back in other areas, appreciate the research and development that has for so long been an important differentiator for the business. A 3M that stops innovating may not be worth owning.
No easy answer in the face of heightened uncertainty
I believe that 3M will muddle through the legal headwinds. The business, meanwhile, is muddling through its own weak patch, but that’s not unusual for a cyclical industrial business. I wound up selling most of my position (I kept a tiny holding so I would continue to monitor the developments) because there is no way for me to track the legal problems and the company can’t supply detailed information. I decided that the potential gains weren’t worth the uncertainty for me or my family.
I believe most investors will probably want to err on the side of caution here, though more intrepid types might want to stick it out or even buy the stock. Just recognize that a lot depends on the outcome of the company’s legal headwinds, which are nearly impossible to gauge right now.
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Reuben Gregg Brewer has positions in 3M. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
