I have key thresholds for reconsidering my commitment to a stock, and 3M (MMM 0.46%) recently passed through one. Given the broader legal and regulatory situation at the company, I chose to sell most of my shares and put the cash to work in a different industrial stock. Although I did this very recently, a big breakthrough appears on the horizon on a key legal headwind. Should I change my mind on 3M stock?
Why I bought 3M
The big-picture reasons for my purchase of 3M boils down to just a few points. The company has a long and successful history behind it, highlighted by its ability to increase the dividend annually for 65 consecutive years. It is a Dividend King. You don't build a record like that by accident, noting that the list of headwinds over that span is pretty big and includes, for example, the high inflation of the 1970s, the technology bubble in 2000, and the Great Recession.
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Meanwhile, 3M's stock has declined materially, pushing its dividend yield up toward historically high levels. The yield today is a huge 6% or so. So it is a historically well-run company trading at what appears to be a historically attractive price. Meanwhile, it is large, diversified, and has a long history of innovation and an investment-grade-rated balance sheet. There is a lot to find attractive here if you are a contrarian or value investor, which tends to be where I find myself more often than not.
The bad news behind the stock price decline covers two broad categories. The first is middling business level performance. I reasoned that this is likely to be resolved over time either through internal innovation or via acquisition and divestiture activity. The second problem is harder to define, as 3M faces a number of lawsuits related to its products and production processes. Again there are two big issues, "forever" chemicals and military ear plugs.
My sell call
My drawdown on the stock was enough for me to use for other purposes (offsetting gains elsewhere in my portfolio), so I harvested the loss in 3M by selling most of my position. I've since used that to "move" some REIT shares from a taxable account, where I had to pay taxes on the income, to a Roth account, where the income is tax free. That's a win for me, as it will help me reduce my taxes come April 15.
But the real trigger for that decision wasn't 3M's business. I believe it will be able to weather the legal headwinds it faces. My problem is that I can't really track the progress because 3M can't talk about legal issues. That leaves me with an investment that I just don't feel comfortable handing off to my wife or daughter in the case I face an untimely death. Too much uncertainty.
And then, just shortly after I sold the stock, there was a major legal breakthrough on the forever chemical front. A number of other companies had reached a preliminary settlement with a key counterparty. The news was notable enough to allow 3M to delay a major forever chemicals case in the expectation that it, too, would reach a settlement agreement. The stock rallied on the development.
The good news here is that a settlement would help to define the size of the forever chemical problem. So I understand why the stock rose. The problem is that this is just one case on the forever chemical front and there are still more to deal with. There's no telling how those situations will play out. The financial impact is likely to be large and linger for years.
Then there's still the earplug issue to work through. And this particular legal headache just got a little worse, with a bankruptcy judge rejecting the company's plan to put its earplug unit into bankruptcy to hive off the legal risks. So solving forever chemicals, if that actually happens, still leaves 3M with another massive lawsuit to settle. In the end, I don't believe the situation has improved enough to change my mind on selling 3M stock. Uncertainty remains high and it is still almost entirely impossible for me to keep tabs on.
Time to move on
At one point I thought I would own 3M forever, but as the situation changed (including the company's plan to spin off its healthcare division) I had to change my thinking. While I still have a very small position (so that I will have the financial incentive to track the company and see if my long-term turnaround thesis still plays out), I have largely exited the stock. As a generally conservative investor, I am willing to take on troubled stocks if I am given regular updates on progress. Indeed, every company faces adversity at some point and that alone isn't a reason to pass on a generally well-run company. But with no way to tell how 3M is doing with some of its biggest headwinds, a situation that remains unchanged, I still feel like selling was the right choice for me.
