The shares of industrial giant 3M (MMM -0.66%) have fallen roughly 30% over the past year. The stock is down some 60% from the most recent high-water mark in 2018. The dividend yield is a historically elevated 5.7% (above the levels seen during the Great Recession) despite a more than 60-year streak of annual dividend hikes. If you are a contrarian investor, 3M should be speaking to you today.
Was it good or bad?
The company just reported first-quarter 2023 earnings, and the news was a mixture of good and bad. On the good side of the equation, the company's roughly $8 billion in revenue in the quarter exceeded the $7.6 billion that analysts had been looking for.
And the $1.97 per share in adjusted earnings easily bested Wall Street's expectation for something closer to $1.60. Investors tend to like it when a company beats on the top and bottom lines, particularly when the difference is so large on the earnings front.
Image source: Getty Images.
This information, however, has to be seen in a larger picture. For example, 3M's revenue in the first quarter of 2022 tallied up to a bit over $8.8 billion. So the top line declined around 9% year over year. The industrial giant's adjusted earnings per share (EPS) in the first quarter a year ago were $2.63, which equates to a huge year-over-year decline of 25%. When you look at this comparison, the company's quarterly results don't look nearly as good.
To be fair, 3M operates in a cyclical industry, so performance swings are fairly normal. And inflation has been raging over the past year or so, putting material pressure on margins. The company's adjusted operating-income margin declined from 22% a year ago to 17.9% in the first quarter of 2023. A lot of companies are facing similar headwinds.
In the end, given that the company exceeded the Wall Street consensus on the top and bottom lines, it seems to be navigating the current pressures better than expected.
The bigger picture
So "mixed" is probably the best way to describe the first quarter of 2023. Which helps explain why the company announced a round of layoffs along with its earnings, as it looks to keep cutting costs to combat its rising costs. All in, for the full year, management is expecting sales to drop between 2% and 6%, with organic sales off as much as 3%.
Adjusted EPS is projected to fall to between $8.50 and $9, which compares to $10.10 in 2022. Notably, the company earned $10.73 in 2021, so the drop in 2023 is just a continuation of a longer trend. This helps to explain some of the stock price weakness of the past few years.
That said, 3M has a long and successful history, highlighted by its status as a Dividend King. You don't build a streak of 50-plus years of annual dividend increases by accident or without facing some short-term turbulence along the way.
Given 3M's long focus on innovation, it seems highly likely that it will eventually get the top and bottom lines moving in the right direction again...eventually. Long-term investors might find the investment story here compelling.
But there's a deeper issue that investors need to understand before buying 3M stock. The company's earnings under generally accepted accounting principles (GAAP) are roughly $0.21 per share lower than adjusted earnings. For many companies, the one-time items that get pulled out of earnings to create adjusted earnings are, indeed, one time in nature.
But not for 3M. In the year-ago period, the one-time items amounted to $0.37 per share. The majority of these "one time" costs are related to legal and regulatory expenses tied to product liability lawsuits and environmental contamination issues. These issues are not going away anytime soon, and the financial impact could get larger if progress on either front is unfavorable.
In other words, 3M, despite a historically high yield, is a stock that only the most aggressive investors should be looking at today. The uncertainty around the legal and regulatory issues materially complicates the business outlook.
On the back foot
Although 3M performed better than expected in the first quarter, that is in no way a sign that its troubles are over. Financial results are still trending downward, and the large "one time" costs it is pulling out of earnings are going to linger for much longer.
This is a stock that is most appropriate for aggressive investors, and even then, you need to consider that you could probably get a virtually risk-free CD with a yield of around 5%.
