Despite the legal problems, 3M’s business is still fine

Wall Street loves a good story, although it tends to focus on one problem without taking the time to see the whole picture of a company. This is probably what is happening with the industrial giant 3M (Mmm 1.82%) these days as its legal and regulatory issues get a lot of attention. Admittedly, these are significant issues, but they mask the company’s still-decent underlying results. Let me explain.

3M is running some big negative numbers

3M recently bankrupted a division that makes earplugs. The hope is that the move will help it limit product liability litigation costs the company is facing over the earplugs and their use by the US military. Before it’s all over, the litigation is likely to cost billions of dollars. As part of the bankruptcy, 3M has already set aside $1 billion to help pay potential claims. While the move will hopefully help shield the parent company from further legal liability, it’s far from clear at this point whether the effort will succeed as hoped.

Image source: Getty Images.

The earplug liability issue is the big headline today, but there are other negatives waiting for their time. It should be noted that the company has long used chemicals that do not degrade easily in the environment. Although it has since stopped using many of these chemicals, the areas around some of its factories need to be cleaned up. There are large costs associated with this cleanup effort, and it is complicated by the need to work with regulators to get cleanup plans approved. The costs here are potentially even more open.

So there’s good reason Wall Street is looking at industrial giant 3M with a half-empty eye right now. But that doesn’t necessarily mean the company is a bad investment right now. In fact, the negatives have pushed the stock price down about 50% from the peak levels seen in early 2018. The stock is down 30% in 2022 alone. This has pushed the dividend yield to an all-time high, currently around 4.7%.

3M has a solid history and a decent track record

The fact is, 3M still generates enough profits to continue increasing its dividend annually, something it has done for more than six decades, making it an elite dividend king. It has faced adversity several times over the past 60 years and survived admirably. Investors may be making the mistake of simply writing off the company right now.

Notably, the company reported adjusted organic annual growth of 2% in the third quarter, despite the fact that its respirator business is returning to normal. That single product line, which saw a huge surge in demand at the start of the coronavirus pandemic, was a headwind by 1.4 percentage points in the quarter. The industrial sector is highly cyclical and 3M faces increasing headwinds, including on the inflation front. But organic sales are holding up relatively well.

The power of organic sales is all over the business. Each of the company’s four divisions was up on that metric in the third quarter. And each of the divisions also posted 20% plus adjusted operating margins. So while the backdrop isn’t great, and it looks increasingly likely that the global economy will see stagnant growth, 3M is coming through the period in decent shape.

3M stock is not for the faint of heart

It would not be correct to assume that 3M is suitable for all investors, as there is a high degree of uncertainty and the risks are significant. The stock is best suited for contrarian investors willing to hang on during what are likely to be tumultuous times as the company seeks to turn its fortunes around. However, it’s worth noting that the company is in the process of spinning off its healthcare operations, which could be used as an excuse to cut the dividend.

Still, if history is any guide, 3M has a strong business that should survive today’s headwinds. That fact, given the stock’s deep decline, could make today a great time to dip your toes into the stock.

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