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Why 3M Is a Retiree's Dream Stock

By Reuben Gregg Brewer - Feb 12, 2021 at 10:10AM

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If you are looking for a core retirement holding, there are four reasons industrial giant 3M should be on your shortlist.

When looking to buy stocks that you will hold in retirement, you really should tread carefully and seek out companies that have stood the test of time. Industrial giant 3M (MMM -1.14%) is one of them. However, you shouldn't just buy at any price, which is what makes 3M so attractive right now.

Here are four reasons why 3M is a retiree's dream stock today.

1. Incredible history

In 1902, five men got together to start a corundum mine. They didn't find what they were looking for, but instead of giving up, they used the anorthosite they found. Business wasn't good, but they kept going with what they had. Three years later, they built their first factory and the floor collapsed, but it didn't stop them. They kept going and introduced the company's first proprietary product, Three-M-ite, in 1914.  

A man holding an umbrella figurine over a platform balancing two small bags with dollar symbols on them on one side, while four blocks spelling out RISK balance the other side

Image source: Getty Images.

That's just 12 years of 3M's history, but it tells you a lot about the more than 100-year-old company. It was a century filled with ups and downs, including major wars and recessions, yet somehow 3M, long known as Minnesota Mining and Manufacturing, rolled with the punches and kept moving forward. It may sound silly, but a company is like a living thing: It takes on a life of its own, with each individual employee being like a cell in the larger whole. A culture of survival means something, and 3M -- from day one -- has dealt with difficulties and continued to push on. 

2. Rewarding investors

But a company that muddles through thick and thin isn't enough; you also want to find a business that cares about its shareholders. 3M started paying dividends in 1916. These days it is working on a 63-year-long streak of annual dividend increases. That's more than twice the length of time needed to make the company a Dividend Aristocrat.  

To be fair, the most recent boost was a miserly 1%. But given that 3M is dealing with a global pandemic, being conservative with the increase doesn't seem like a bad call. Looking back over the past decade, the annualized rate of increase was roughly 10%. Obviously, the size of the boosts will go up and down over time, but it is pretty clear that 3M realizes how important returning value to investors is no matter what is going on in the world.  

3. The stock is trading at a discount

Sticking with the dividend for a second, 3M's yield is currently around 3.3%. That's not huge and it would be understandable if income-focused dividend investors dismissed the stock. But that would be a mistake because 3.3% is actually toward the high end of the company's historical yield range. That higher-than-average yield suggests 3M shares are relatively cheap today.

MMM Dividend Yield Chart

MMM Dividend Yield data by YCharts

There's a reason for the current low price. Part of it is the pandemic, but there are also lingering concerns about some ongoing environmental and product lawsuits. These could be expensive to deal with, so it isn't unreasonable to be worried. However, the company has a debt-to-equity ratio of around 0.2 and a huge $100 billion market cap. It should have the size and financial strength to handle any potential repercussions. Yes, you'll need to take on some risk here, but the historically high yield appears to be worth it. 

4. Innovation and the future

The last big reason to like 3M is that it was founded on innovation; it is part of the company's DNA. 3M spent roughly $1.9 billion on research and development in 2020. That amounts to nearly 6% of sales. It has a history of success in the space and a habit of taking developments from one part of the company and using them in others.  

Being willing to continually look for the next big breakthrough is a hallmark of 3M's success and one that helps ensure it will continue to be an industry leader. Every year won't be a good one and every new development won't be a blockbuster, but over time, commitment pays off. And 3M's history proves that research and development spending is a key driver of long-term success. It should remain one for the foreseeable future.

Not perfect, but still dreamy

3M has some blemishes today in the form of legal issues, but that's opening up an opportunity for long-term investors and others -- like retirees -- looking for a decent dividend yield from a great company. History, and 3M's size and financial strength, suggests that it will muddle through the current headwinds. Its research and development efforts will likely help the company learn new tricks and thrive as a result. In the meantime, retirees can collect a historically generous dividend yield backed by decades of annual increases. That's a package that sounds pretty attractive.

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