After the worst start to a year in over 50 years, everyone would like to forget the stock market's performance for the first six months of 2022. Even after rallying hard since the beginning of July, the S&P 500 remains down 11% year to date.
Yet some stocks continue to lag the popular index's performance, failing to enjoy the same sort of recovery most other companies did. Moreover, because their businesses aren't broken, they remain good long-term picks for an investor's portfolio because you can pick them up at a relative discount to where they previously traded and they still have great growth potential.
One of the best that fits the bill just might be industrial conglomerate 3M (MMM 0.86%), which is down 18% this year after losing 25% of its value over the past 12 months. Remember: A low stock price is not reason enough to buy a business; it needs to be able to recover in the years to come. That's why 3M should be on your short list of stocks to buy and hold for the next decade.
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A litany of issues
3M's problems didn't begin in 2021 or 2022 -- it's been a laggard for a number of years. Its stock sits at lows not seen since the start of the pandemic, and before that, the middle of the last decade.
I won't gloss over the problems 3M has faced that have caused the underperformance. It has a long string of earnings disappointments, having to cut guidance in some way almost every quarter since CEO Michael Roman took over in 2018, including last quarter when the maker of Post-it notes, Scotch tape, and N95 surgical masks reduced its full-year sales outlook from between 1% and 4% growth to a loss of 2.5% to 0.5%.
It also faces potentially substantial legal liability over lawsuits involving its respirator masks. There are several cases pending that 3M respirators failed to protect workers from asbestos, silica, coal mine dust, and other occupational dusts as well as environmental hazards surrounding perfluorinated compounds. Those chemicals are also products 3M began manufacturing in the 1950s and 1960s. It started phasing out production of these chemicals starting in 2000 and no longer makes such compounds. Finally, it is facing another lawsuit recently over the quality of earplugs it sold to the military through an acquired company.
It proves that even the stocks of good companies don't become cheap without reason, and it requires investors to assess whether the business can recover and grow once more.
Getting smaller to grow bigger
Conglomerates like 3M also tend to get discounted because the market is often unable to properly assess and value their many moving parts. 3M's operations stretch across consumer, safety and industrial, transportation, electronics, and healthcare.
Streamlining the business is one way these diversified businesses tend to regain their footing. Emerson Electric, General Electric, Honeywell, and other conglomerates have all shed businesses to one degree or another and 3M is beginning the process of doing the same.
Last December it agreed to divest its food safety business in a merger with Neogen that will value the new company at around $5.3 billion and give 3M shareholders a 50.1% stake in the business. 3M itself will receive $1 billion in consideration upon completion of the deal.
More recently 3M announced it was selling its sports and medical tapes and bandages business to Thailand-based Selic, while also spinning off its healthcare division into a new publicly traded company focused on wound care, oral care, healthcare IT, and biopharma filtration. The spinoff is expected to be completed by the end of 2023.
3M sold off its drug-delivery business and gas detection assets in 2019.
A history of rewarding shareholders
Despite its various problems, 3M remains a financially sound company. Last year it produced $6 billion in adjusted free cash flow while returning $5.6 billion to shareholders through the payment of $3.4 billion in cash dividends and $2.2 billion share repurchases.
3M has paid a dividend to investors for nearly the entire 120 years it has been in operation and it has raised the payout for 64 consecutive years, making it a Dividend King. The dividend currently yields 4.1% annually and looks to be in no immediate danger of being cut or suspended.
You're not going to see 3M transform into a tech stock-like growth stock, but it will continue to be a steady stalwart. As it narrows its far-flung empire the market will be able to more fully appreciate its value and that makes 3M a beaten-down stock you can buy today and safely hold for the next decade and beyond.
