Editors note: This article was written before a judge ruled on Dec. 22 that 3M could not transfer liability to a unit of the company that had filed for bankruptcy protection.
To say shares of 3M (MMM 0.46%) have been a disappointment of late is a considerable understatement. The stock's been a downright lousy performer for far too long, currently down more than 50% since its early 2018 peak. Nearly every facet of its operation seems to be struggling these days.
Many of its challenges, however, are finally easing as we move into 2023. This shift could readily prompt a long-awaited rebound for the company, as well as for the stock. Here's a closer look at the three biggest things now working in 3M's favor as we prepare to turn the calendar.
The U.S. dollar is starting to lose value
Investors keeping tabs on 3M will likely remember the organization lowered its full-year revenue and earnings guidance in late October. Namely, its previous expectation for 2022 sales growth between 1.5% and 3.5% was dialed back to a range of 1.5% to 2%, and the company is now calling for 2022 per-share earnings of $10.10 to $10.35 versus its prior guidance of $10.30 to $10.80. Its free-cash-flow-margin rate is also apt to come in lower than initial expectations.
While there are many factors driving this contracted outlook, the company made a point of pointing to the still-rising value of the U.S. dollar, making it tough to sell its goods to foreign customers. The greenback's value had grown more than 20% just since the middle of the year by October -- a huge gain by currency standards -- reaching a multiyear high that month.
The thing is, this isn't exactly a new problem. The U.S. Dollar Index has been rallying since 2011, proving a major, recurring fiscal stumbling block for the company that whole time. That's what can happen when roughly half of your revenue is generated overseas.
But the sky-high value of the dollar is now peeling back in a big way.
Data source: Yahoo Finance. Chart by author.
Fueled by a combination of now-cooling domestic inflation and the long-overdue economic recovery for most of the rest of the world, the U.S. dollar now sits 9% under its late-September peak. It also seems still be heading lower, since U.S. inflation should continue to level off and most other nations should continue to build on their rekindled economic growth.
At the very least it means the greenback's long rally could be leveling off, which means 3M can now get a handle on its foreign pricing and demand dynamics.
3M is mitigating current and future lawsuits
In addition to its currency-related struggle, legal woes have proven a major overhang for 3M shares for a while now.
The biggest of these challenges is the class action lawsuit being levied by former users of its earplugs. More than 200,000 veterans are suing the 3M subsidiary that makes them, claiming its product failed to prevent the noise-related hearing loss they were supposed to prevent. The matter could cost the company billions of dollars when all is said and done.
Except, now it might not.
While it's a controversial legal maneuver, the U.S. Chamber of Commerce as well as the American Tort Reform Association now both publicly agree with 3M's legal argument that a declaration of bankruptcy for the subsidiary should shield the parent company from the brunt of this legal liability. The matter has yet to be settled in an appeals court, but the tide appears to be turning back in 3M's favor. The class action suit's participants may end up opting for a much smaller settlement now that their initial demand is in jeopardy.
Separately but simultaneously, the company announced earlier this week it would stop manufacturing fluoropolymers, fluorinated fluids, and PFAS-based additive products -- so-called "forever chemicals" that are not only potentially harmful but can remain molecularly intact for decades.
The company won't discontinue production until 2025. To the extent the court of public opinion impacts what happens inside an actual courtroom, the company seems to be making an effort to evolve into a good global citizen. Consumers and corporations alike have already made clear these are the kinds of organizations they'd prefer to buy from.
The price is low, and the dividend is high
Finally, credit has to be given where it's due. Despite a large number of distracting and expensive challenges in recent years, 3M has continued to pay its dividend. Indeed, the company has not only made its dividend payment in every quarter for decades now, but has raised its annual dividend payment every year for the past 64 years. That makes it a Dividend King and one of the market's very best-pedigreed dividend payers.
Its dividend history isn't the chief reason an income-minded investor might want to consider stepping into this particular stock here and now, however. Even more compelling is how the stock's prolonged weakness has ratcheted up the current dividend yield to an attractive 4.8%. You can find higher-yielding, cheaper stocks, but you won't find higher yields without greater risk than 3M currently brings to the table. It's also priced cheaply at only 11.6 times the coming year's projected per-share profits of $10.42.
This above-average dividend/below-average valuation has implications beyond driving immediate income. Thanks to higher interest rates, don't be surprised to start seeing value stocks like 3M outperforming stocks of growth companies that rely heavily on low-cost capital.
In other words, 3M shares could soon be catching a major cyclical tailwind not seen in years as investors shift their style preference.
