Is it really so bad at iconic industrial giant 3M (MMM 0.86%) that the company can't turn things around? I don't think so, but Wall Street apparently does and has put the stock on sale. Here's why I jumped at the chance to buy shares even while other investors were fearing the worst.
I bought during the bear market
Although it seems like a very long time ago, the U.S. stock market fell into a bear market in early 2020. That was driven by COVID-19-related fears, and, at least so far, turned out to be a great time to buy stocks. At this point, the S&P 500 Index has basically recovered all of the losses, with some high-profile technology names posting truly stunning gains.
Overall, global industrial powerhouse 3M hasn't done quite as well as some other stocks (more on that in a second), but I'm still up on my purchase. That said, the stock is still worth a deep dive despite its recent gains. Here are three reasons why:
Image source: Getty Images.
1. Reasonably priced
When I started buying 3M stock earlier this year, the dividend yield was in the 4% range. That's pretty high for this company, which has only sported a 4%-plus yield twice over that past 30 years. The last time was during the deep 2008-09 recession and bear market. The yield spike this time around was similarly driven by a recession and bear market. I actually thought I'd have more time to keep buying at those levels, but the market turned on a dime and started to rally, taking 3M along with it.
The stock today carries a roughly 3.4% dividend yield. That's not nearly as nice as 4%, of course, but 3M still looks historically attractive. You would have to go back to the mid-1990s if you wanted to see a 3.4% yield on the shares. With the S&P 500 Index offering a paltry 1.9% or so average yield, 3M is the type of stock that dividend investors could easily love. And, based on the still historically high yield, it remains worth a closer look.
MMM Dividend Yield data by YCharts
2. Some flies in the ointment
But why, exactly, is the stock relatively cheap? The most obvious reason is that it is a cyclical industrial stock and 3M's fortunes tend to rise and fall along with the economy. With the world suffering from the aftereffects of the economic shutdowns used to slow the spread of the coronavirus, it makes sense that investors would be a little worried about the company's prospects. However, 3M has an incredible 62-year streak of annual dividend increases. It has managed through a large number of recessions, and it has come out the other side just fine. There's no particular reason to expect this recession will end any differently.
The bigger worry is that 3M is dealing with a couple of potentially large lawsuits. One is environmental and the other is product-related. These are going to be long, drawn-out fights, and the headline numbers are likely to be pretty ugly at first. There have been some fairly dire predictions here as well.
My belief is that 3M will be able to handle the cost of the suits and eventually move beyond them. Backing that up is the fact that it is a $375 billion-market-cap giant with an investment-grade credit rating and ample access to capital markets. The company's financial debt-to-equity ratio is roughly 0.25 times, which is higher than normal but certainly not a troubling number. And it covered its trailing interest expenses by nearly 16 times in the second quarter, an impressive number that allows plenty of leeway for adversity. Yes, the lawsuits are an issue, but my gut and the company's balance sheet are telling me that 3M can handle the hit.
3. Innovation powerhouse
There's one more negative here, and that's the fact that 3M's top- and bottom-line growth has been less than exciting in recent years. That, however, doesn't worry me, because one of the long-term hallmarks of 3M's success is innovation. Most notably, the company's ability to use new technology, often developed in-house, in unique ways across its entire portfolio. Adhesives is one of the more famous examples, with the company using its innovations in products ranging from wound care to post-it notes.
The problem with innovation is that it doesn't happen in nice, smooth increments. What's important is that a company remains dedicated to the process, as 3M is, so that R&D spending can have a long-term positive impact.
Putting it all together
Ultimately, I believe 3M is attractively priced, can handle the headwinds it is facing (even the legal ones), and has an innovation-driven business model that will thrive over the long term (as it has thrived in the past). When the bear market was in full swing investors were running away from just about everything, but I saw it as an opportunity to buy a great company at what historically appeared to be a dirt-cheap price. I held my breath and stepped in. While the price isn't quite as attractive today, the truth is it still appears pretty desirable for long-term dividend investors. In other words, if you're willing to hold your breath too, you might still want to jump aboard 3M.
