There's a lot to like about 3M (MMM +2.36%), including a huge 5.7% dividend yield. That yield, meanwhile, is backed by a company that has increased its payout annually for a massive 65 years, making it a highly elite Dividend King. These were key factors when I decided to invest in 3M.
Here's why you might want to buy this iconic industrial giant -- and why I ended up choosing to sell most of my position.
3M has an interesting history
3M traces its history back to 1902. The company was set up to mine for a particular mineral and failed to find it. Quickly shifting gears, 3M managed to muddle through this early hardship. That resilience is something of an ingrained company trait and it started basically on Day 1.
Image source: 3M.
3M's big breakthrough came in 1914 with the introduction of Three-M-ite Abrasive Cloth. This product, which was exclusive to the company, was a hit and started 3M on the path toward a focus on internal research and development. The company's first R&D facility -- technically a lab dedicated to quality testing -- was built in 1916. From there, things just picked up pace, with the business growing and diversifying over the years.
But the key takeaway here is that from the very start, 3M has been a resilient company with a heavy focus on creating and selling its own branded and innovative products. At this point, the industrial specialist's portfolio includes thousands of products spanning its safety and industrial, transportation and electronics, consumer, and healthcare divisions (more on this latter segment below).
Although 3M hasn't been firing on all cylinders lately, it seems reasonable to give the Dividend King the benefit of the doubt. It has endured hard times before and survived; it is likely to do so again. But what exactly are the problems it faces today?
3M is dealing with a lot of bad news
From a business perspective, 3M's performance has been sluggish. That's not shocking at all. Every company that exists for long enough will go through good and bad periods. 3M is in the doldrums, but I'm confident it will find a way out in time. R&D success can be lumpy, so there's no telling when the next big thing will come along. But when it does, the company has a proven history of using it to enhance products throughout its portfolio. From this perspective, 3M is a contrarian buy but not a particularly risky one. After all, you don't become a Dividend King by accident -- it requires consistent performance through both good and bad times.
The real problem here comes from the lawsuits and regulatory headaches that have befallen 3M. These types of issues aren't unusual for a company as large as 3M, but the legal costs and regulatory issues surrounding its environmental and product liability headwinds are huge. They stem from earplugs the company sold to the U.S. military and from its production of so-called forever chemicals.
Key Data Points
This is where my problem with 3M really came to a head, because the company can't really talk about legal issues until they are basically resolved. That makes sense, but it means 3M has been difficult to follow. And, worse, when news comes out, it can be shocking. I simply didn't want to own a company that I couldn't really track. Even though I listened to every quarterly conference call and followed the 3M news feed, I still ended up with negative surprise after negative surprise. But truth be told, I don't even like good surprises (3M is, in fact, making progress with the lawsuits, but the costs are enormous). When I buy a stock, I want it to be boring. If you are like me, you'll probably want to avoid 3M for this reason alone.
And then there's the April 1 spinoff of the company's healthcare segment. This was supposed to be 3M's crown jewel growth business. But the legal and regulatory costs it is facing basically necessitated the spinoff so that 3M could raise the capital it needs to pay its legal expenses. This spinoff is taking place from a position of weakness, which isn't a good look. There's also the chance that the spinoff will lead to a resetting of the dividend given the size of the division (about 25% of business segment sales in the fourth quarter of 2023). In other words, the dividend here may not be quite what it seems.
I bailed because I couldn't stand the heat
If you are looking for a turnaround stock, 3M could be right up your alley. There's a lot of uncertainty today, but it seems highly likely that this industrial giant will endure to see better days. The company's long and storied history suggests that it has what it takes to make that happen. But getting from here to there will not be an easy, quick, or risk-free process. 3M is only a buy for investors that can stomach uncertainty and live with a lack of insight into what is going on given the legal nature of many of the headwinds.
I am a conservative investor who likes to know as much as possible about what is going on at the companies I own. I sold virtually all of my 3M stake because I can't handle the uncertainty involved here. Someday I might revisit 3M, but for now, I'm on the sidelines watching this still-volatile story unfold in fits and starts.
