In the industrial sector, few names carry the same weight as 3M (MMM 0.22%), a company once known as Minnesota Mining and Manufacturing. It was such a beloved stock that its ticker simply replaced the name because that's what everyone on Wall Street called it anyway. However, even great companies will go through hard times at some point. And that's the backstory for why I sold most of my 3M stake.
The list of 3M's problems is long
In recent years, 3M's growth hasn't lived up to historical trends. That's not good and it has investors worried about the future. Adding to that is a broad sense that this once innovative industrial company hasn't been focusing enough on its research and development efforts. The Wall Street Journal even ran an expose highlighting the problem, which isn't a good look for management. These challenges are a big negative, but business is like a sine curve with regular ups and downs. It seems highly likely that 3M will muddle through these headaches to see better days.
Image source: Getty Images.
Far more troubling to me are the company's legal headwinds. It has been dealing with product liability issues surrounding earplugs it sold to the military, as well as environmental concerns about its production of so-called forever chemicals. The costs have been huge so far, and 3M isn't done yet with all of the legal obstacles it is facing.
I believe 3M will manage to get beyond this problem, too. It is unfortunate that the effort to do so is going to lead the company to spin off its healthcare division, but that's not exactly the end of the world. All told, it is a large, financially strong business that should be able to take a few sizeable hits and keep on fighting. But still, it is these legal issues that led me to sell most of my position in the stock. (I own a single share now to force myself to keep watching it.)
The example that proves the case
After buying the stock, I tried to pay close attention to what was going on with 3M's legal problems. What I read mostly came from the media (generally after events had happened) or from legal firms trying to get clients. What was absent from the mix was detailed information from 3M. The only way to get that side of the story would have been to dig into court documents, which I simply don't have the time to do. In other words, it felt like I was flying blind and management didn't do anything to help change that.
To be fair, given the legal issues, I understand that 3M can't really talk about what's going on. At first, that didn't bother me, but as the cases dragged on, it started to get more and more frustrating and upsetting. The uncertainty that the lack of information created was more than I was comfortable with and I sold almost all of my shares, capturing the loss I had suffered to offset gains I had taken elsewhere in my portfolio.
Key Data Points
As a case in point, there was a class action lawsuit approved by the courts that would have allowed nearly 12 million Ohio residents to sue 3M. Settling such a class action suit would likely mean billions of dollars in settlement costs. Just dealing with the case is likely to cost millions of dollars. It is a big deal and it was bad news when the court approved the class action status. The company couldn't discuss the case.
And then a higher court rejected the lower court's ruling on the matter, which is a win for 3M, though it is unlikely to be the end of the story. That's great news. Again, the company couldn't really discuss the issue. The ultimate problem for me is that both the loss and the win kind of came out of the blue because management couldn't talk about what was going on. That's not something I'm comfortable with given the scale of the legal troubles 3M is facing.
Risk isn't a problem, but uncertainty is
I'm not averse to investing in situations that involve high risk. In fact, I replaced 3M with fellow Dividend King Leggett & Platt, which is going through hard financial times. The difference is that Leggett & Platt can discuss what's going on with its business in great detail, but 3M has to keep mum on some of the most important challenges it faces today. I learned a lesson with 3M: Don't buy stocks dealing with big legal issues because it makes sleeping well at night too difficult.
