After 3M (MMM 0.46%) reported full-year 2023 earnings, its stock price fell roughly 10%. There were several problems in the update, notably including the company's 2024 outlook. But the big story here is uncertainty.
Here's what investors need to be thinking about as they make a buy, sell, or hold decision regarding 3M.
Sell 3M
The easiest takeaway from a deep dive into 3M is that conservative investors, particularly those who want to sleep well at night, should sell the stock. There are a few reasons for this.
Image source: Getty Images.
First, the company is working through massive legal and regulatory problems that have cost it a huge amount of money. The total cost is likely to be well into the billions before all of the issues are put to rest. The list includes product liability lawsuits around earplugs 3M sold to the U.S. military, environmental issues left behind at facilities that produced forever chemicals, and legal matters that have arisen from the forever chemical situation.
The big problem for investors in all of this is that 3M can't really talk about what is going on. That makes complete sense, given they are legal and regulatory problems; it really has to limit what it says publicly. But shareholders are, as a result, left in the dark. That's not a particularly great situation and increases the stress of owning 3M, even though it has a long history of rewarding investors via a growing dividend (it's a Dividend King).
That said, the company's fourth-quarter earnings call made clear that it has limited options for paying all of the legal and regulatory costs it faces. During what is normally a boilerplate comment about forward-looking statements, the senior vice president of investor relations stated: "Absent the proceeds from the intended spin-off of the healthcare business, the company has not concluded how it would fund amounts due under the public water supplier and Combat Arms earplugs legal settlements."
In other words, the costs that 3M faces are forcing the company into a corner and the options it has are pretty limited. The healthcare division was expected to be a growth business for 3M. Selling off what some might consider the company's crown jewel is not a good look. And, given the size of the business segment (about 25% of revenue), it seems likely that a dividend reset will be necessary following the spinoff.
There is a lot of uncertainty today, which exacerbates any bad news, like the relatively weak full-year 2024 outlook the company gave when it reported full-year 2023 earnings. When you add that to all of the other negatives, Wall Street's harsh reaction seems appropriate. This is not a sleep-well-at-night stock.
Buy or hold 3M
To be fair, a lot of pessimism is already reflected in 3M's stock price. The shares are down around 60% from their 2018 highs. The dividend yield, meanwhile, is near all-time highs. For a contrarian investor, these two facts suggest that 3M is trading at deeply depressed levels and might be a turnaround candidate.
That, of course, will depend on successfully navigating the legal and regulatory issues. But given the company's size and financial strength (it is investment grade rated), it seems likely 3M will manage that feat. Yes, it may require spinning off one of its more attractive businesses, but the rest of 3M isn't bad. The company's collection of industrial operations is just expected to grow more slowly than healthcare.
But there is the question of the dividend, which is likely to be reset with the healthcare spinoff. If the healthcare business pays a dividend and 3M resets its own dividend so that the combination of the two dividends is the same as it was before the spinoff, then there wouldn't really be a dividend cut. And 3M might be able to maintain its Dividend King status, which is an important psychological issue for many investors. But the key is that there is a path forward in which the dividend isn't technically cut. And that would make the lofty 6.2% dividend yield here pretty attractive, considering that the S&P 500 index's yield is a scant 1.4%.
However, the buy-and-hold arguments both must contend with the same information vacuum. That means that investors need to believe that all of the legal and regulatory issues will work out in a way that doesn't materially alter 3M's business prospects, beyond the healthcare spinoff. With so much work left to be done before this period of uncertainty is over, buying or holding 3M requires both a glass-half-full outlook and a great deal of faith. That probably limits its appeal to a small subset of the investing world.
There are no simple solutions at 3M
Although 3M has a storied history, there is so much up in the air today that most investors will probably be better off watching from the sidelines. That's particularly true if you are a conservative income investor. Only more aggressive investors who are interested in turnaround situations should probably buy or hold this industrial giant.
