Shares of 3M (MMM -0.10%) took a hit on Tuesday, sliding about 6% following the company's fourth-quarter report. The maker of diversified industrial, consumer, and healthcare products reported lower-than-expected earnings per share and slower-than-anticipated growth as management said that its consumer-facing products saw demand weaken amid a challenging macroeconomic environment.
While the quarterly update certainly highlighted some reasons to be concerned, the stock's recent beating may be more than pricing in the challenges ahead. Indeed, shares of this strong dividend stock are starting to look quite attractive at this level.
Stalling growth
Based on 3M's fourth-quarter update, business performance could prove to be disappointing in the near term. Highlighting the company's stalling growth, organic revenue increased just 0.4% year over year in 3M's fourth quarter. This was below the company's prior view for fourth-quarter top-line growth between 1% and 3%. In a telling insight about the state of the current macroeconomic environment, demand for the company's consumer-facing product lines weakened at an accelerated rate in December compared to the rest of the quarter.
Looking ahead, 3M said in the company's fourth-quarter update that it expects "macroeconomic challenges to persist in 2023." Indeed, the company's view for the challenges ahead is so bleak that 3M announced it is reducing its manufacturing headcount by 2,500 people. This is "a necessary decision to align with adjusted production volumes," explained 3M CEO Mike Roman in the update.
Looking to the full year, 3M expects sales growth to potentially turn negative. Management guided for its adjusted organic sales growth rate for 2023 to be between 0% to negative-3%. Adding in several other factors, including foreign exchange impact and a divestiture impact, 3M expects total sales to fall between 2% and 6% year over year.
A cheap valuation
But here's the good news. With 3M trading at just 10 times earnings, investors have largely already priced in tough times ahead. The stock's 6% decline on Tuesday, therefore, simply made a compelling buying opportunity even more attractive.
Furthermore, the company's impressive dividend helps make the investment decision easier. 3M's current dividend gives investors a dividend yield of nearly 5%. Making the case for 3M's dividend stronger, the company's resilient dividend model has helped 3M pay dividends to its shareholders annually for more than 100 years. The company has provided shareholders with a dividend increase for 64 consecutive years.
More dividend growth is likely. After all, 3M currently pays out only about 52% of its annualized earnings in dividends. That means there's plenty of room for dividend growth -- even if sales take a temporary hit during a tough macroeconomic environment. However, the company's move to lay off thousands of employees could help offset some of the impact to profits that a revenue decline could lead to. So it's possible that 3M's profits actually hold up nicely over the next year, making an even stronger case for further dividend growth in 2023 and beyond.
While 3M isn't an exciting stock, its reliable business has produced cash for shareholders for years. The stock's post-earnings decline arguably represents a good buying opportunity.
