I sold most of my position in industrial giant 3M (MMM 1.85%) a little while ago because I couldn't track the progress it was making on major legal issues it faced. Since I reduced my exposure to the company, it has agreed to two large financial settlements. That's good news, but I'm still not ready to view the stock as a buy again.
These settlements are costly
The two largest legal issues facing 3M lately have been the product liability related to earplugs it sold to the military and the environmental impacts of "forever chemicals" the company produced. I believed when I bought the stock -- and still believe today, even after I've sold most of my stake -- that it will survive this period of uncertainty. But because of the nature of legal concerns, management can't discuss what is going on with either of these problems, and that left me too uncomfortable to maintain a material stake in the company.
Image source: Getty Images.
That said, some things have started to become more clear. For example, 3M reached a roughly $10.3 billion settlement around forever chemicals. Following that, it inked a $6 billion agreement to settle the ear plug suit. Clearly, significant progress has been made on both fronts. However, the $16 billion or so price tag is also noteworthy. The payments associated with both settlements will likely be a headwind to financial results for a while.
As if that weren't enough for management to deal with, 3M continues to work toward a spinoff of its healthcare business. This division was expected to be a key growth driver for the company. The plan to spin it off appears to be motivated by a desire to protect the group from the company's legal issues, but that comes at the expense of 3M's long-term growth. And, given the size of the business, there's a possibility the spinoff coupled with the legal settlements will result in a dividend cut for this industrial giant. That's not something I wanted to be around for.
3M's troubles aren't over
But don't think that all of the legal problems are behind the company. Perhaps it has largely resolved the earplug issue. But the forever chemicals settlement was only reached with a modest subset of all of the people and companies that were likely impacted by 3M's production of the products. In other words, $10.3 billion is likely just the starting point.
Key Data Points
On the positive side, the settlement will likely set some financial parameters around future settlements. But that has to be juxtaposed against the number of people and companies that may try to sue 3M. For example, 3M settled with municipal water providers, but there were other water providers that weren't involved in the settlement. And then there are residents that live near impacted areas -- each person could, theoretically, also file a lawsuit. A lot has been achieved, but the final cost is still unknown.
Meanwhile, because these are legal issues, 3M's management team will not be able to provide material updates to shareholders. That's normal, but not exactly satisfactory. This is particularly true if you are a conservative investor, given the significant costs involved and the impact they could have on the company's ability to pay its dividend. Despite the pair of important legal settlements, 3M remains a high-risk turnaround story.
I'm happy on the sidelines
So, is 3M stock a buy? The answer for most investors will probably be no, there are simply still too many unknowns. More aggressive investors willing to take on a turnaround stock might find it interesting, but the healthcare spinoff and related potential for a dividend cut only make the story more complicated. All told, if you decide to buy high-yield 3M (the dividend yield is a huge 5.6%), you'll have to be prepared to fly blind on some of the issues that will have the biggest impact on the company's stock price. Tread carefully.
