3M (MMM +2.36%) was once considered a stable blue chip stock, but major problems weighed down its shares in recent years. The diversified conglomerate struggled with sluggish sales in a chilly macro environment, safety-related recalls, and thousands of lawsuits related to its production and dumping of harmful chemicals.
The company also cut its dividend in 2024, which ended its long reign as a Dividend King, and in April, it spun off its healthcare division as Solventum (SOLV 1.52%). After ups and downs over the past five years, its stock is up by just 20% or so, while the S&P 500 has rallied by about 90%. On a total return basis (with dividends included), the index's performance has still more than doubled the conglomerates.
Image source: 3M.
However, 3M's business has gradually stabilized over the past year. With that in mind, should investors buy 3M's stock as a value play today and expect the company to overcome its challenges in the next few years?
Why did 3M underperform the market?
3M sells more than 60,000 products for the industrial, worker safety, and consumer goods markets. It develops adhesives, abrasives, laminates, films, personal protection equipment, auto care products, and even electronic circuits. Its most well-known consumer brands include Scotch Tape, Scotchguard, and Post-It Notes.
|
Metric |
2021 |
2022 |
2023 |
2024 |
|---|---|---|---|---|
|
Organic sales growth |
8.8% |
1.2% |
(3.2%) |
1.2% |
|
Operating margin |
20.8% |
19.1% |
(43.4%) |
19.6% |
Data source: 3M.
3M's sales grew rapidly in 2021 amid the economic recovery from the earlier phases of the pandemic. But in 2022 and 2023, it suffered a slowdown as inflation, rising interest rates, and geopolitical conflicts rattled the global economy.
Those headwinds mainly impacted its safety and industrial, transportation and electronics, and consumer divisions; its healthcare segment (now Solventum) was largely resistant to them.
As 3M's sales growth slowed, its margins were crushed by its soaring legal costs. First, it has been incrementally paying a $6 billion settlement from 2023 to 2029 for selling defective combat earplugs. Second, it has agreed to pay $14 billion over the next decade to clean up U.S. drinking water supplies contaminated by PFAS (perfluoroalkyl and polyfluoroalkyl substances), also known as "forever chemicals" because they take centuries or millennia to break down naturally in the environment. 3M has been manufacturing these chemicals for decades, and they've been linked to numerous health risks. Also, insurance giant AIG (AIG +0.59%), which provided liability coverage to 3M, is suing the conglomerate and refusing to cover any of those payments.
But in 2024, 3M's organic sales rose again as its operating margins turned positive on a generally accepted accounting principles (GAAP) basis. Its sales stabilized as inflation cooled and the macro environment warmed up again.
As a result, it reduced its net debt (its total debt less cash, cash equivalents, and marketable securities) from $10.2 billion at the end of 2023 to $5.3 billion at the end of 2024. That big improvement indicated that 3M won't be buried by its settlement liabilities.
Key Data Points
What's next for 3M?
Bill Brown, who took the helm as 3M's new CEO in May, plans to shift some of its focus and investments to faster-growing markets, accelerate its R&D efforts, and improve its supply chain visibility to avoid future brand-tarnishing recalls and lawsuits. Brown also wants 3M to ramp up its new product launches and refresh its portfolio at a faster rate.
For 2025, 3M expects its organic sales to rise by 2% to 3% as its adjusted EPS (which includes its spin-off of Solventum, but excludes its litigation expenses) to grow by 4% to 8%.
During the fourth quarter conference call, Brown said while the "macro recovery continues to be uneven," 3M would work to "shorten the development cycle time to increase launch cadence" and "focus investment dollars on higher octane programs" to generate "higher sales and margins" from new products. 3M launched 169 products in 2024, up 32% from 2023. For 2025, Brown expects 3M to see another double-digit percentage increase in product launches.
Is it the right time to buy 3M's stock?
Those are steps in the right direction, and 3M's stock looks reasonably valued at 19 times the midpoint of its adjusted EPS forecast for 2025. It also pays a dividend with a decent yield of 2% at the current share price, and it plans to keep buying back more of its shares.
However, 3M isn't cheap enough to be considered a value stock, and its dividend yield is still much lower than the 10-year Treasury's 4.4%. The company is also still on the hook for billions of dollars in settlement payouts, and its turnaround efforts could take years to bear fruit. It could also be difficult for it to simultaneously accelerate the pace of new product launches while improving its quality control and safety standards.
As such, I'd avoid 3M until a few more green shoots appear. There are plenty of better-run companies that trade at lower valuations and pay higher dividends. Investors should stick with those stocks instead of buying 3M.
