I recently made a portfolio shift, capturing a material loss in 3M (MMM 0.48%) so I could reduce the tax hit from taking profits in a real estate investment trust (REIT) that I will be switching into a Roth account. As I reduced my stake in 3M, however, I decided I needed to make another change. That included buying Leggett & Platt (LEG 1.86%). Here's a side-by-side comparison to show why I got into Leggett & Platt instead of waiting and going back into 3M.
1. Dividend Kings
One of the things I like to see in a company is a proven ability to handle adversity. Every company faces hard times, as nothing goes up or down in a straight line -- in life or on Wall Street. That's as true for a $55 billion market cap diversified industrial giant like 3M, which makes thousands of products across the safety, industrial, healthcare, automotive, electronic, and consumer products arenas, as it is for $4 billion market cap Leggett & Platt, which makes bedding, furniture, flooring, fabric, auto, hydraulic, and aerospace products.
A company's dividend history is where I look for an indication of success here, since you don't continually increase a dividend each year without doing something right.
Image source: Getty Images.
Leggett & Platt has increased its dividend annually for 52 consecutive years. That's pretty impressive, and it makes the company a highly elite Dividend King. And while it falls behind the 65-year streak of 3M, I consider them on fairly equal footing on this point.
2. Yield
There are any number of industrial stocks that I could buy, but there are comparably few with great dividend histories and impressively high yields. To put numbers on that, 3M's yield is roughly 6% today, while Leggett & Platt comes in at 5.7%. Those are generous on an absolute level and relative to the broader market. Dividend yield isn't the only reason to buy a stock, but with very similar yields, I wasn't giving up much dividend income with this switch.
3. Historically high
I have a value bent, looking for well-run companies (like Dividend Kings) that have historically high yields. That is exactly the situation for both 3M and Leggett & Platt today.
On this score, 3M's dividend yield is about 50% above its five-year average, while Leggett & Platt's yield is around 20% higher than its longer-term average. Essentially, though 3M looks much cheaper, it still appears that I'm buying Leggett & Platt while other investors are selling, which is my general preference.
4. Why so high?
Which brings the story to the biggest difference. Both 3M and Leggett & Platt are dealing with a difficult business environment. That's not shocking given that they are both cyclical industrial stocks. Business naturally ebbs and flows along with the broader economy.
Leggett & Platt is a major player in the bedding and furniture market (combined roughly 55% of revenues), so the upheaval in the housing sector today has investors extra worried. Industrial giant 3M has a much more diversified business, but it is still subject to the normal ups and downs of economic cycles.
The more important difference is that Leggett & Platt is only dealing with economic headwinds. Industrial giant 3M is also facing legal (product liability) and regulatory (environmental cleanup) problems that could lead to unpredictable outcomes and are definitely resulting in high ongoing legal costs.
Notably, since I bought 3M, the company has announced plans to spin off its healthcare division (its most growth-oriented business) to presumably protect it from litigation issues elsewhere in the company. And it is exiting the business of "forever chemicals" -- substances that do not break down in the environment -- which hints that the legal and regulatory issues here could be bigger than they appear. The company is large, financially strong, and profitable, so 3M likely survives these headwinds.
But as an investor, I can't really track the progress because the company can't talk about legal matters. Without that baggage, Leggett & Platt wins out.
Skin in the game
I have decided to keep a small position in 3M so I force myself to watch how the story unfolds. But having captured the loss, and given the changing landscape at the company, I can't justify going back in. Given the many similarities between 3M and Leggett & Platt, I've switched over to the bedding company so I can avoid all the legal headaches of 3M. Or, going back to another key underpinning of my investment approach as I age, my heirs won't have to deal with them if I should pass away unexpectedly.
