3M Company (MMM), the conglomerate known for its innovative household and industrial products, has been making some major moves lately that have shaken up its stock and its position in the market. Last week, they dropped a bombshell by cutting their dividend for the first time in over 60 years! The slashed payout is a pretty big deal, considering it ends the stock's run as a Dividend King - a title it takes about half a century to earn.
But here's the thing: this dividend cut didn't come out of nowhere. 3M just finished spinning off its healthcare business, Solventum (SOLV), on April 1. And get this - that healthcare arm was responsible for roughly 30% of 3M's cash flows. So, when they said goodbye to Solventum, it was bound to shake things up financially.
Now, 3M is playing it safer - and more sustainably - by setting their dividend payout ratio to around 40% of their adjusted free cash flow, versus about 60% prior to the Solventum spinoff. As you might expect, this move has got some investors scratching their heads and wondering if 3M is still the reliable passive income pick that dividend investors have come to know and love.
So, after abdicating its royal title, the question remains: Is 3M stock still worth buying after this historic dividend cut? Let's dive in and find out.
How Is 3M Stock Performing?
3M stock has been a long term underperformer, but the stock is making a slow and steady comeback. It's up 12% over the past year, and sports a YTD gain of just over 6% - not too far behind the broader S&P 500 Index ($SPX).
Of course, stock price doesn't tell the whole story. MMM's balance sheet is looking pretty solid, with a cash balance of $10.9 billion at the end of the recently concluded quarter. The Solventum spinoff generated nearly $8 billion in cash, and 3M still holds just under 20% of SOLV common stock, which it plans to monetize.
The company's first-quarter results in 2024 showed a resilient performance, with a slight increase in adjusted revenues and a notable improvement in operational efficiency. MMM managed to beat expectations with adjusted earnings per share of $2.39, a solid 12% increase from the same period last year. That's no small feat in today's challenging economic environment.
3M's Strategic Moves
3M has been making some major moves lately, and it's not just about the financials. They're investing in their future, shaking things up in the boardroom, and putting some big legal issues to rest.
First up, let's talk growth. 3M is pumping $67 million into their Valley, Nebraska facility, adding a massive 90,000 square feet of space. This expansion is all about boosting production capacity and creating around 40 new jobs in the area for their personal safety products. With new production lines, equipment, and a warehouse, they're gearing up to meet growing demand more efficiently.
But it's not just brick and mortar. 3M is also making changes at the top. As of May 1st, William "Bill" Brown has taken over as CEO, while Mike Roman has transitioned to Executive Chairman. This leadership shuffle could signal a new direction, with fresh perspectives and strategies coming into play.
Now, the elephant in the room: legal settlements. 3M has been dealing with some hefty lawsuits, but they're starting to put those issues to bed. In April 2024, they finalized a massive $10.3 billion settlement with public water suppliers across the U.S. over PFAS contamination. This settlement is huge, helping 3M move past a significant legal hurdle and showing they're taking responsibility for their environmental impact.
In a similar vein, 3M also settled the Combat Arms Earplug litigation, which has been a major headache. As of the final registration date, over 99% of claimants have signed on, which is a massive step forward in resolving this long-running dispute. Dealing with lawsuits is never easy, but 3M seems to be making progress in putting these issues behind them - significantly reducing some negative overhang related to the lingering uncertainty.
Is 3M Still a Good Dividend Stock to Buy?
Speaking of lingering uncertainty, the announced dividend cut also puts another big question in the rearview.
For over a century, this industrial giant has been a reliable source of dividends - and 3M boasts an impressive 64-year streak of annual increases. But after spinning off its cash-printing healthcare business into Solventum Corporation (SOLV), 3M has decided to "reset" its dividend payout ratio to about 40% of adjusted free cash flow.
The exact figure for the new reduced dividend is pending board approval, but it's expected to be announced in May 2024, and distributed in June. “Paying a competitive dividend has been a priority for 3M for more than 100 years. This will continue to be true,” said outgoing CEO Mike Roman alongside news of the reduced payout.
The news came as a relief to analysts at JPMorgan (JPM), who upgraded MMM stock to "Overweight" from "Neutral" and raised their price target to $111 from $110.
In a note to clients, the analysts attributed the upgrade to “a combination of an attractive valuation, an increasingly cleaned up balance sheet, with the dividend cut catalyst behind them now, and a turn in earnings momentum on a bottom in electronics, with better visibility on remainco fundamentals.”
However, the broader analyst community maintains a cautious stance, with a consensus rating of "Hold." Out of 12 analysts offering recommendations, two advocate for a “Strong Buy,” eight suggest a “Hold,” and two lean towards a “Strong Sell” - a general improvement from two months ago, when the stock had zero “Buy” ratings to its name.
The mean target price stands at $105.00, presenting a potential 9.4% upside from Monday's close.
On the earnings front, analysts are forecasting EPS of $7.23 for fiscal year 2024, followed by 8.3% growth to $7.83 in FY 2025. Priced at 13.68x forward earnings, MMM looks reasonably valued at current levels.
The Bottom Line on 3M Stock
So, after slicing through the layers of 3M's recent upheavals — from its dividend cut to spinoffs, C-suite shakeups, and legal settlements — the big question remains: Is 3M stock still a buy? With legal issues resolved, a new CEO at the helm, and analysts growing optimistic, the stock could be worth picking up here for patient investors in search of value and growth potential.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
