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Here's Why the Best Is Yet to Come for 3M

By Reuben Gregg Brewer - Dec 23, 2020 at 10:10AM

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Industrial giant 3M remains relatively cheap, and it still has an important cultural factor that should see it through to better days.

The stock market is usually pretty good at discounting the future, but sometimes investors get a little too pessimistic. That appears to be what is going on at global industrial giant 3M ( MMM 1.37% ) these days.

Here's a quick look at why long-term investors might want to put this stock on their wish lists anyway.

A valuable opportunity

Shares of 3M are about breakeven for the year, which is actually not so bad given the coronavirus pandemic. That said, the S&P 500 Index, using the SPDR S&P 500 ETF as a proxy, is up around 15%, so 3M is actually lagging well behind the broader market. Push back a little bit further and 3M's stock performance is actually pretty grim, with shares down roughly 25% over the last three years, compared to a 37% gain for the S&P 500. 

A cow colored piggy bank with coins around it.

Image source: Getty Images.

Although those are disappointing numbers, relatively speaking, there's a potential opportunity here for dividend investors. The industrial giant's yield is currently around 3.3%, way better than the roughly 1.6% you'll get (on average) from S&P 500 Index stocks. That 3.3% yield is also toward the high end of 3M's historical yield range, suggesting that the stock is relatively inexpensive today. The last time the yield was this high was during the 2008-09 recession. 

Notably, that dividend is backed by 62 consecutive years' worth of annual dividend increases. That puts 3M into the highly elite Dividend Aristocrat category. And it shows a material commitment to returning value to shareholders via dividends over time. Also, over the past decade, the average annual dividend increase was around 10%, handily beating the historical growth rate of inflation

The problem and the solution

Why wouldn't everyone want to run out and buy 3M stock? There are two issues facing the company. The first is that it is a cyclical industrial company, so performance tends to ebb and flow along with the global economy. Right now the world is facing hard times thanks to the coronavirus, so 3M's recent financial performance hasn't been particularly great. That's no shock, but it helps explain the laggard performance in 2020. 

From a bigger-picture perspective, 3M is facing a couple of material product and manufacturing lawsuits. Negative outcomes here could be financially significant. That's why it has lagged over the past three years. However, 3M is a $100 billion market cap giant. Its financial debt-to-equity ratio is a modest 0.2 times or so. And it covers its trailing interest expenses by a robust 14 times. It has the size and financial strength to deal with its legal issues.  

More important for its long-term success, however, is the fact that it remains focused on research and development. This is the foundation of 3M's business, as the company works to develop and acquire technology that it can use to produce unique and innovative products. And it has an impressive history of taking things developed in one part of the company and spreading them to others. As an example, its expertise in adhesives covers products from industrial glues to Post-it Notes to dental and medical products. 

MMM Research and Development Expense (Annual) Chart

MMM Research and Development Expense (Annual) data by YCharts

The real story here, however, is persistence, since it takes time to create new things. On that score, 3M has clearly not given up on its research and development efforts -- its annual spending here increased 33% over the past decade. That's a commitment that should pay off over the long term, and lead to rewarding returns for investors willing to stick around through the current headwinds. 

Great doesn't come cheap

At the end of the day, 3M isn't exactly cheap. It's just relatively cheap compared to its history and the broader market. But for a company with such an incredible history behind it, and an R&D commitment to ensure it has an equally bright future, "relatively cheap" is actually a pretty attractive opportunity. If that sounds good to you, then now is a great time for a deep dive examination of the investment potential for this company. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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