What happened
Shares of the industrial conglomerate 3M (MMM 0.32%) ended July on a strong note but failed to sustain the momentum. They plunged 13.2% in August, according to data provided by S&P Global Market Intelligence.
3M made a huge announcement in July that sent its stock flying, but a lingering overhang of lawsuits that could cost the company billions of dollars panicked investors and sent the stock tumbling to multiyear lows.
Key Data Points
So what
3M faces massive litigation risks, including lawsuits by veterans for faulty earplugs that caused hearing problems. While these lawsuits were expected to hurt 3M, investors only got an idea about the extent of potential damage last month. It stunned them.
A litigation consultant hired by lawyers who have sued the conglomerate for defective earplugs said 3M faces "more than $100 billion in losses and bankruptcy" if all of those lawsuits numbering more than 230,000 go forward, according to a Bloomberg report.
Yes, the consultant sees 3M heading to bankruptcy in the coming years. Also, for perspective, 3M's market capitalization at the time of this writing was around $66 billion.
What miffed the veterans' lawyer is 3M's move to file for bankruptcy for Aearo Technologies, a company 3M acquired in 2008 and that made the earplugs. Although 3M has also set up a trust to the tune of $1 billion to settle the lawsuits, the lawyers argue that the amount hugely falls short of potential settlements and Aearo's bankruptcy will absolve 3M of any further liabilities.
The bankruptcy court has already denied 3M's controversial attempt to halt the lawsuits under its bankruptcy plan, and a new federal lawsuit now has even sought to block 3M's dividends and its move to spin off its healthcare business.
3M stock is hugely popular among income investors given its incredible track record of 64 consecutive years of dividend increase. In just the past three years, 3M has returned more than $14 billion to shareholders in the form of dividends and share repurchases.
In a surprise announcement in July, 3M announced plans to spin off its healthcare operations into a separate entity by the end of 2023 to unlock greater value from the business that has otherwise been a laggard in recent years. Although investors in 3M cheered the announcement, they soon realized that the company's legal risks can't be overlooked anymore.
Now what
With 3M shares heading lower and lower for some years now, investors are losing patience with the Dividend King. 3M's legal battle, which has gotten big and ugly, will likely continue to hurt the stock as investors stay wary of the legal costs.
