As a dividend investor it is hard to overlook 3M (MMM 0.46%) today. To sum up the attractiveness of the stock as quickly as possible, it is a Dividend King with a historically high dividend yield of 5.9%. The negative view is that the stock has been heading steadily lower because of problems that are likely to linger. Here's what you need to know.
A losing proposition
If you had invested $10,000 in 3M three years ago you would have roughly $6,650 today. Over that span, the stock has declined by a third while the S&P 500 Index has increased by 40%. Put another way, a $10k investment in the S&P 500 would be worth around $14,000 today, or more than twice as much as what you'd have if you put your hard-earned cash into 3M stock.
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That's not a particularly pleasing set of numbers, but there's more to the story. That's because 3M's shares were headed higher until the first half of 2021. From its peak, the stock has now fallen by around 50%. So an investor who bought in three years ago would have seen a nice advance that was followed by a harrowing drop. Since losing money generally feels way worse than making money, that giant drawdown would have been, well, difficult to stomach.
It is entirely possible that this industrial giant's stock has finally hit rock bottom. But that will be almost impossible to predict because it isn't just financial performance that's in play here, though the company's results have been less than impressive. The uncertainty is largely tied to legal and regulatory issues.
What's gone wrong?
There are two main headwinds today. The first involves earplugs that 3M makes for the military, a business it acquired some years ago. Although the company believes, used correctly, its earplugs are safe, there is a large class action lawsuit in which users claim the earplugs were defective. This is among the largest product liability lawsuits in history, with the potential for it to be even larger than asbestos.
The cost of this legal issue is still up in the air. For starters, 3M is paying to defend itself, so the longer the case goes on the more it is going to cost, even if 3M eventually wins (this is true of all of the legal and regulatory issues it is dealing with today). That said, 3M has won some individual cases and lost some, too. It is hard to predict what will happen when a judge and jury get involved. The company is trying to settle the case and even attempted to put the specific business unit involved in making the earplugs into bankruptcy to try to get this resolved (a judge ruled against 3M with regard to this legal maneuver). Basically, there's no way to tell what will happen from here, but the outcome could be very expensive for 3M and its shareholders.
Then there's 3M's production of forever chemicals, so called because they don't break down quickly. There are regulatory issues around this, with the company looking to clean up production sites where these chemicals have built up over time. That process will likely take years and cost a significant amount of money. But there's also liability lawsuits here, as well.
Most recently, 3M agreed to pay at least $10.3 billion in a settlement with some drinking water providers. That's a big number, but it's really just the tip of the iceberg, because it only covers contamination cleanup costs for municipalities and doesn't include personal injury cases. In other words, like the earplug issue, the forever chemical issue is still a big unknown despite what looks like progress being made in dealing with it.
Only for the intrepid
I owned 3M and eventually decided that, despite my belief that it will muddle through these headwinds, the uncertainty was too great. If I were to pass away, I'd be leaving my family with an investment that was just too complicated for them to handle (that's morbid, but I'm old enough that I need to consider such things). So I harvested most of my loss and used it to make some big-picture portfolio shifts.
That said, 3M is large and financially strong, but it is already making major changes because of the legal issues, including exiting the forever chemicals business and spinning off its healthcare division, likely to protect it from the legal issues. There are a lot of moving parts to understand and it isn't clear that the dividend will survive (it seems likely that the spin-off will require a dividend reset of some sort).
At this point, 3M looks more like a turnaround stock than a dividend investment. And that's a style of investing that only more aggressive investors should try their hands at, recognizing that the important events from here will include a lot of legal resolutions that are, at best, unpredictable.
