Great companies don't go on sale very often because, simply put, everyone knows they are great companies. And yet no business manages to avoid the difficult times that put investors on edge.
Right now industrial giant 3M (MMM -0.84%) is dealing with some company-specific issues and, despite the broader market being near record highs, its stock price looks pretty attractive today. Here are four reasons why it's a great time to buy 3M.
1. 3M's dividend yield is enviable in comparison to the S&P 500
Most investors don't make full use of the information provided by a company's dividend yield. That's particularly true for companies that have long histories of supporting their dividend through thick and thin, like 3M. To put a number on that, the industrial conglomerate has increased its dividend annually for more than six decades, making it a vaunted Dividend King. In other words, its dividend payment is probably the most consistent thing in the company's financial statements, which is why the yield can be such a powerful valuation tool.
Today, 3M is offering investors a 3.2% dividend yield. On an absolute basis that's not huge. But it happens to be much more than the 1.3% you'd get from an S&P 500 index fund. And, more importantly, it is also toward the high end of the company's own historical yield range. That suggests that 3M stock is historically cheap right now.
2. 3M is in a bear market all its own
In addition to sporting a high yield, 3M's stock is also in the doldrums. That is, to some extent, a piece of the yield math, since dividend yield and stock price move in opposite directions. But there's a reason to step back and look at the stock numbers, too.
Specifically, 3M's current stock price is nearly 30% below its early 2018 highs. A market correction is generally assumed to be about a 10% decline. A bear market is generally considered to have started at a 20% drop. So 30% puts 3M soundly into bear market territory and, for investors willing to think long term, that's another reason to like this longtime dividend payer.
3. 3M has diversification, size, and strength
Then there's the fact that 3M is a powerhouse of a company, with a massive portfolio of proprietary products, many of which are developed in-house, spread across such sectors as safety and industrial (33% of segment revenues), transportation and electronics (26%), healthcare (24%), and consumer (the remainder). The worst segment operating margin in the recently ended third quarter was a strong 19%, in its transportation and electronics division. Each business, meanwhile, saw organic growth in the quarter, with the worst being healthcare at 3.3%. In other words, 3M has a diversified business, and it's doing fairly well.
On top of that, the company has an investment grade-rated balance sheet. And it has a market cap of $105 billion. These aren't guarantees of success by any stretch, but they suggest that 3M has ample capacity to deal with business headwinds if they should arise.
4. This, too, shall pass
This brings us to the biggest issue facing 3M right now -- lawsuits. These are not small issues by any stretch of the imagination, relating to contamination from some of the company's previous manufacturing facilities and questions about the ability of earplugs sold to the military to actually prevent hearing loss. Worse, working through these issues could take some time, since the legal system often moves at a snail's pace.
However, given the company's size and financial strength, it should be able to take the hit. Notably, there's also insurance to help offset the pain, though the company won't discuss specifics on this front. And given that the market has reacted to the legal headwinds by pushing the stock down around 30% and the dividend yield up to a historically high 3.2%, perhaps this isn't the worst thing for investors who can think long term.
Indeed, it is the legal headwind, which obviously needs to be monitored, that has presented an opportunity to buy 3M at a fair, if not attractive, price. As noted, great companies don't go on sale often, but when they do you need to act despite the negatives.
Don't let this opportunity slip by you
To be fair, 3M is no slam-dunk investment right now. You need to go in with the knowledge that the legal issues it faces will linger for years and could, when resolved, mean a hit to the company's image and finances. You can't ignore the concerns. But, the stock looks relatively cheap today, given its material price decline and high yield.
And yet the business is large, financially strong, and diversified. The problems, well, they will eventually be dealt with one way or another and won't likely change the long-term future of this well-run industrial giant. This suggests that, despite the legal concerns, now is probably a great time for investors to buy 3M.