With a forward P/E ratio of less than 10, and a great dividend yield of 6.5%, industrial conglomerate 3M Company (MMM 0.46%) looks for all the world like a high quality large-cap dividend stock trading for a bargain price. But looks can be deceiving.
Earlier this month, my fellow Motley Fool contributor Travis Hoium posted a point-by-point explanation for why he is not currently (and may not ever again be) interested in buying 3M stock. Just a few days later, RBC Capital analyst Deane Dray chimed in with a warning of his own: 3M stock is going to just $84 a share, which would cost investors as much as a 9% loss from the closing price notched just before Street Insider posted the RBC analyst news.
Is 3M stock a sell?
Dray's criticism of 3M centers on the company's plans to spin off its Solventum healthcare business, which contributed nearly 10% of 3M's operating profits last year.
As Dray explains in a note covered on StreetInsider.com, the loss of this operating income is likely to hurt 3M's ability to maintain its generous 6.5% dividend yield. Actually, Dray says it makes this dividend downright "untenable," preventing 3M from growing its dividend any further, and even necessitating a 50% to 70% dividend cut.
Dray could be right about that. 3M's normalized per-share income has been under $6 per share -- the amount of 3M's annual dividend -- for two years running now. If operating income falls 10% (about $1 per share), then a dividend cut does seem likely. Yet according to Dray, few analysts are factoring into their valuations the effect a dividend cut would have on 3M's popularity. If the company cuts its dividend, investors would have many other lucrative dividend stocks to choose from.
3M could lose its dividend luster -- and investors could lose 9%.
