Even generally well-run companies go through bad times. It is how the business world works, with bad times eventually followed by good ones. The key is to find companies that are struggling and thus have cheap stock prices but have the strength to make it through the pain to the good times. That is the likely outcome at 3M (MMM 0.38%).
Here's a look at the problems and the reason to believe the headwinds are temporary.
What's wrong with 3M
For starters, $70 billion market cap industrial giant 3M has seen its revenues grow at an annualized clip of 1.8% over the past decade. Net income, meanwhile, increased by a pretty anemic 3.3%. That's not much to write home about. While the company is aware of the problem and working on getting itself into a higher gear, that effort has been complicated by the lingering impact of the coronavirus pandemic.
On top of slow growth, the company is also dealing with chemicals that have been released from its factories. These chemicals don't degrade in the environment and need to be cleaned up. That's an ongoing effort and one that will likely be costly to solve. And then there are the legal issues surrounding 3M earplugs sold to the military. The claim from users is that they didn't work, and that resulted in hearing loss. The company counters that they worked but weren't used properly. 3M has won some court cases and lost some court cases. Even if the company ends up winning every case in the end, the costs will still be material.
On the environmental and legal front, 3M recently changed its earnings presentation to highlight the costs it is facing. On a generally accepted accounting principles (GAAP) basis, 3M earned $2.26 per share in the first quarter of 2022. Pull out the environmental costs ($0.26 per share) and legal expenses related to earplugs ($0.13 per share), and it made $2.65 per share. So, all in, around 15% of adjusted earnings went toward these two issues; that's a pretty big number.
The stock price result
Investors don't like the kind of uncertainty that's showing up in 3M's business today. And as such, the stock has been punished. The shares are down by more than a third since their 2021 peak. And the dividend yield is now a historically high 4.6% or so. The only other times the yield has been that high was during the 2007-09 Great Recession and in the early days of the coronavirus pandemic in 2020 (also a recession, but a very brief one).
MMM Dividend Yield data by YCharts.
Dividend yields can be used as a rough proxy for valuation, and the historically high yield here suggests that 3M is cheap today. But that's only true if it can get past the current slate of headwinds.
The outlook is?
There's no point in mincing words -- 3M is muddling through a very difficult period, and it could be a long time before it is fully clear of the headwinds. Indeed, dealing with legal issues and environmental problems can be slow going at times. So investors shouldn't buy this stock thinking there's a quick solution because there really isn't. But that doesn't mean that 3M is somehow doomed.
For example, with a massive market cap and investment-grade-rated balance sheet, 3M has plenty of capacity to deal with adversity. And despite the cost of the issues, the company remains solidly profitable. So there's little reason to doubt that it can keep moving forward even as past issues drag on its business. No, it won't be pretty, and the expense will add up to a material figure, but the risk has to be put into the bigger perspective of 3M's large, diversified, and generally well-respected business.
As for sluggish growth, there's no quick cure here, either. But 3M's history of innovation suggests that this period will eventually end. The problem is more likely the fact that innovation is unpredictable and lumpy. Since investing in R&D is core to 3M's business model, has historically been a key growth engine, and continues to be well funded, there's no reason to doubt that the company will get back on track here at some point.
A little faith
The real problem in all of this is that investors need to trust that 3M can get through all of its problems to benefit from a brighter future. That requires faith, which is usually not in high supply during a bear market. However, with over 60 consecutive annual dividend increases under its belt, this Dividend King probably deserves the benefit of the doubt. In the meantime, investors can collect a historically high yield while they wait for all of the problems to get resolved.
