3M (MMM 1.70%) was once a dependable dividend stock for conservative investors. The diversified conglomerate sold a broad range of industrial, worker safety, and consumer goods, and it was a Dividend King that consistently raised its dividend annually for more than 50 years. It's also been in the S&P 500 since the index's inception in 1957.
But over the past three years, 3M's stock declined about 12% as the S&P 500 rose 25%. It struggled with sluggish sales and faced grueling recalls and lawsuits. It also dropped out of the Dividend King club in 2024 after it cut its payout and spun off its healthcare unit as Solventum (SOLV 0.40%). Let's see if this unloved stock can bounce back over the next three years.
Image source: 3M.
What happened to 3M over the past three years?
3M sells over 60,000 products, including adhesives, abrasives, laminates, fire protection products, personal protective equipment, various types of films, insulation materials, car care products, and electronic circuits. Its top consumer brands include Scotch Tape, Scotchguard protectants, Post-It notes, and Nexcare bandages. 3M was growing at a healthy rate back in 2021, but its organic sales growth slowed down significantly in 2022 and 2023 as its operating margins crumbled.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Organic sales growth |
8.8% |
1.2% |
(3.2%) |
|
Operating margin |
20.8% |
19.1% |
(27.9%) |
Data source: 3M.
The growth of its safety and industrial, transportation and electronics, and consumer businesses all stalled out as it grappled with inflation, high interest rates, geopolitical conflicts, and other macro headwinds across the world. The only bright spot was its healthcare segment, which is now known as Solventum.
As 3M struggled to grow, it was hit by thousands of lawsuits for its production and dumping of PFAS (perfluoroalkyl and polyfluoroalkyl substances), which are also known as "forever chemicals." 3M has already agreed to pay $14 billion in PFAS settlements so far, but the insurance giant AIG (AIG 0.24%) recently sued 3M and is refusing to cover any of those payments. 3M also needs to pay another $6 billion settlement from 2023 to 2029 related to a recall of its defective earplugs.
All of that litigation is casting dark clouds over 3M's future, since it ended its latest quarter with a negative operating cash flow of $1.8 billion, $11.3 billion in long-term debt, and just $7.3 billion in cash, cash equivalents, and marketable securities on its balance sheet. That's why it underperformed the market by such a wide margin over the past three years.
What will happen to 3M over the next three years?
Last May, 3M brought in a new CEO, Bill Brown, to stabilize its wobbly business. Under Brown, 3M plans to shift some of its older products to faster-growing end markets, evaluate potential mergers or acquisitions, and streamline its R&D spending. It also aims to improve its supply chain visibility to avoid more costly quality control issues.
Those might be steps in the right direction, but 3M expects its adjusted organic sales to grow only about 1% in 2024 as its adjusted earnings per share (which includes its spin-off of Solventum but excludes its ongoing litigation expenses) declines 21% to 22%. Therefore, it could take at least a few more years for those turnaround efforts to bear any visible fruit.
At $131, 3M's stock might seem cheap at 17 times its forward adjusted earnings. But it trades at that discount because its growth is anemic, its brand has been tarnished by serious safety and ethical issues, and its turnaround plans are nebulous. Its forward dividend yield of 2.1% also won't impress any income investors in this high-interest rate market.
So while 3M isn't doomed, I expect it to underperform the S&P 500 and many of its industry peers over the next three years. There simply aren't enough compelling reasons to take a chance on this burnt-out blue chip stock yet.
