Editor's note: After this article was written, but before it was published, Reuters reported that two U.S. Army veterans had been awarded $110 million by a jury in a case involving combat earplugs sold by 3M. The author's opinions about the long-term impact of 3M's ongoing legal issues are not altered by the most recent court loss.
There are only a few companies with the same kind of iconic history that 3M (MMM -0.66%), formerly Minnesota Mining and Manufacturing, has to offer. But a great history, including over six decades of consistent annual dividend increases, isn't enough to get investors to overlook some recent troubling headlines. And there's a good reason for that when you examine the $22.5 million legal loss 3M just suffered.
Looking for a cheap stock?
To start off, 3M's dividend yield is currently around 3.4%. That's toward the high end of the stock's historical yield range. That yield has spiked near or above 4% a couple of times, but other than the 2007-2009 Great Recession and the 2020 coronavirus bear market, 3M's yield hasn't been as high as it is today since the 1990s. If you are a long-term dividend investor, now is a good time to take a look at this Dividend Aristocrat.
Image source: Getty Images.
The problem, of course, is that companies don't normally become cheap for no reason at all. The two yield spikes noted above, for example, were driven by broad market sell-offs and economic dislocations. But even taking into account the S&P 500 index's year-to-date swoon so far in 2022, the market has gone up dramatically since its 2020 lows. And yet 3M remains stuck with a historically high yield.
One of the big reasons for 3M's historically high yield is that it is facing some lawsuits around product quality and environmental issues. If a recent court loss is any indication, they could be material.
One loss and one win
How much of a problem these legal issues are is hard to tell, because litigation is ongoing and the company is being pretty tight-lipped about what's going on. To be fair, these are legal issues, so management can't be too chatty. Moreover, lawsuits take time to work through, so there's no quick resolution here. If you buy 3M today, you need to be prepared to suffer through some uncertainty for a relatively long time.
But for those that want a bit of clarity, 3M just lost a single case around the quality of earplugs that it sold to the U.S. military. The cost: $22.5 million. There are more than 250,000 other people claiming to have had their hearing damaged by the same earplugs. You don't even need to do the math to know that this could add up to huge numbers very, very quickly. This is not the first case that 3M has lost, either.
The industrial giant has insurance, which might help to defray some of the expense should these losses stick and lead to a massive settlement. However, once again, management is mum on just how much protection that insurance will afford. So the earplug issue is a black box with a price tag that looks potentially large right now.
But does it? That's because 3M won a similar case that was adjudicated just days after the $22.5 million loss. And the really confounding piece here is that both cases came out of Florida. This is a very difficult issue to handicap right now, though it is probably safe to say that 3M is likely to pay something if it wants the issue to go away.
This brings us to 3M's size and financial strength. It has a market cap of roughly $100 billion and an investment-grade balance sheet. Access to capital probably won't be an issue, assuming the final cost isn't steep. In other words, outside of a worst-case scenario, it's likely 3M can handle the problems it is facing.
MMM Dividend Yield data by YCharts.
And that really gets to the heart of the investment decision here. The stock looks very attractive for dividend investors if 3M's legal costs from the earplug suits and the other legal issues it faces are reasonable. If those costs are not reasonable, there's a very real potential of a dividend cut.
Looking on the bright side
There are no free lunches on Wall Street, as the saying goes, so you have to weigh the positives and negatives with every investment you make. Right now 3M looks historically cheap given its rich yield. There are reasons for that, and it's hard to figure out what's going to happen from here, given the vagaries of legal issues. If you are a glass-half-full type, however, it's probably worth taking a look at 3M today. Just go in knowing that there could be more turbulence in the stock price as it wins and loses more individual cases. Eventually, however, this should pass and, given the company's size and financial strength, it's likely that 3M will survive and continue to thrive.
