Few great companies have had their stocks hit as hard in 2020 as 3M (NYSE:MMM).
The shares are down 15%, after management announced 2019 results that showed just 2% growth and lower profits.
While the company’s price-earnings ratio on Feb. 26 is still above 19, the $1.47 per share dividend now yields 3.9%. That dividend was still supported by earnings.
This begs the question. Is 3M your shelter from the coronavirus storm?
A Series of Unfortunate Events
The biggest problem 3M faces is from polyfluoroalkyl (PFAs) litigation. These are chemicals formerly used in fabrics, Teflon pans and in chrome plating, among other things. They don’t break down in the body. They increase cholesterol levels and sometimes cause cancer.
3M began eliminating PFAs in 2006, as part of an Environmental Protection Agency program, and has been paying out settlements. The total cost to the company, including remediation, could still be as high as $10 billion. This is a serious overhang on the stock, amounting to twice its annual profits. In its fourth-quarter report the company took a pre-tax charge of $214 million, 29 cents per share, on the litigation.
The company also took a charge of $134 million, 20 cents per share, to cover what it called “restructuring,” including 1,500 layoffs. The international operations division was eliminated. In its earnings call the company also said demand from China remains weak, which also dragged down the stock.
But health concerns can also work to 3M’s benefit. The coronavirus from China is increasing demand for respiratory masks, a big 3M product. Overall healthcare sector revenues were up 25% year-over-year in the fourth-quarter report and, 3M insists, demand is outpacing supplies.
Healthcare revenues rose significantly because 2019 also saw 3M buy Acelity for $6.7 billion. The company specializes in surgical wound care, selling under the KCI brand. It will add $1.5 billion per year to the company’s revenue.
Can 3M Come Back?
Hope for the future starts with that dividend. When markets fall in a panic, as they’re doing now, investor tastes quickly shift from capital gains to income, and 3M has that.
The earnings guidance for 2020, while disappointing, was still just 7 cents per share short of analysts at $9.52. The stock was hammered over it because management had cut guidance twice in 2019, and the fourth quarter still failed to meet the mark.
InvestorPlace’s Luke Lango also thinks this could be the bottom for 3M’s businesses. He expects the global industrial slowdown to reverse and believes 3M can gain both growth and margins as a result. The Purchasing Managers Index (PMI), which measures future industrial growth, rose sharply in January to 50.9. This indicates growth may be on the way.
While most analysts give only a tepid “hold” rating to 3M, according to TipRanks, their average price target of $170.75 is still 14% higher than where it was due to open for trade Feb. 26.
The Bottom Line on MMM Stock
The best time to buy a stock is when everyone is negative on it.
But if you’re buying stocks for income, now may be the right time for you to get into 3M. The bad news is already in the stock, and the company will still pay you to own it while you wait to see what happens to the business.
In a down market, a yield of 3.9% is alpha.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.