There are a lot of reasons to like 3M (MMM +2.60%) stock, including a historically high 5.9% dividend yield, a more than 60-year streak of annual dividend increases, and a broadly diversified portfolio. There are also a fair number of reasons to dislike it, including a share price decline of around 50% since early 2021 that shows no signs of stopping. I've owned the stock for a little while, and I'm sitting on sizable paper losses. Here's what I'm thinking about now.
Things are getting worse
When I bought 3M, I knew it was facing some notable headwinds, including legal issues surrounding product liability related to earplugs it sold to the U.S. military, and regulatory and legal issues surrounding so-called "forever chemicals." I believed the investment-grade-rated business was financially strong enough to weather any hit it would face. Meanwhile, 3M was growing slowly, but I believed management would be able to use its heavy focus on research and development to get onto a higher growth track. And while I waited for that to occur, I was able to collect a historically high yield.
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I went in knowing that headline risk would be high, and it has been. The news surrounding the earplug liability question has focused on the company's court losses and not its wins. Even if the company ends up settling or even winning the day with regard to its earplugs, the cost to it has already been quite large. That said, in an attempt to limit its liability exposure, the conglomerate pushed the division that made the earplugs into bankruptcy. A court decided that this move wouldn't remove 3M from the case. At this point, 3M just looks like it's trying to duck the potential financial expense of a loss, even if, as the company's management contends, that bankruptcy move was the best path forward for everyone involved. This is nowhere near over.
On the forever chemical front, 3M for decades made perfluoroalkyl and polyfluoroalkyl substances -- PFAS -- that were used in a host of consumer and industrial products. And while they may not actually last forever, PFAS take an extremely long time to break down. The company has been working to clean up sites contaminated with these chemicals. It's an expensive process, and there are potential liability issues to face, as well. The cleanup period will be long, and now, the company has decided to shut down the business that was involved in producing PFAS. That, too, is a multiyear process. There are more costs to come.
At the same time, the industrial giant announced plans to spin off its healthcare division to shareholders. That division was expected to be a growth engine for the company, so the move looks like 3M is trying to protect its crown jewels from the legal and regulatory issues noted above. While that's not a bad thing, it changes the trajectory for what will remain of 3M and increases the risk of a dividend cut. Healthcare is a sizable business, and companies often reduce their dividend payouts when they spin off divisions. Although this could be viewed as a positive in some ways, there are clear negatives here as well.
All told, the situation at 3M is getting materially more complicated.
What I'm thinking now
The big choice for me is whether or not I stick it out or throw in the towel and accept the sizable loss on which I'm sitting. There are a lot of moving parts to assess. I still believe 3M will survive and thrive over the long term. But I'm not as convinced that management will avoid cutting the dividend, and a continuation of the company's Dividend King status is a key factor for me.
I could add more to the position. That said, I already have done this once, and I'm leery of buying more shares of a business that continues to show signs of weakness. I probably won't buy more at this point.
Key Data Points
I could sit tight and do nothing. That's my default choice as I assess additional information. I try to avoid rash decisions, but I've been taking this stance for a while now, and things have only gotten worse. Yes, I believe things will get better in time, but the road to that long-term outcome could be increasingly bumpy.
I could sell the stock and buy it back later if I so choose, when the future looks clearer. I don't enjoy buying things with a long-term view and then selling them over the short term. However, 3M is currently dealing with issues that it can't fully control, notably on the legal front. That's a hard-to-quantify risk, and it might make sense to step back until that process is further along.
There's a fourth option here: I'm currently selling real estate investment trusts (REITs) from my taxable account and then buying them back in a tax-advantaged Roth IRA. This will save me from having to pay dividend taxes annually on the income from those stocks. I could use the loss from selling 3M to offset the gains on my REITs, thus reducing my capital gains tax liability. And as long as I avoid the wash sale rule and don't repurchase 3M within 30 days, I can get back into the industrial stock later if I choose.
Leaning toward harvesting the loss
At this point, I'm leaning toward selling my 3M shares to capture the loss I've got and using that to offset the gains from selling REITs that I'm moving over to my Roth IRA. After that, I can take the 30-day wash sale period to reassess my views on 3M and think about it as a fresh investment. Basically, the question I must ask myself is, would I buy 3M today if I didn't own it? Like all investors, I hate taking losses, but when a company's situation changes (and it has in this case, thanks at the very least to the spinoff plan) sometimes you have to change your opinion.
