Is 3M stock a buy?

The industrial conglomerate has long had an attractive investment proposition. With a 64-year history of dividend increases and a 5.6% yield, it’s easy to see why. 3M (Hmm -0.34%) It will attract investors looking for income. Furthermore, with long-term cyclical end-market improvements, restructuring activities are expected to improve margins and drive earnings growth. Does all this add up to buy the stock?

3M is not perfect

This conglomerate is far from perfect. The company’s high-profile legal settlements over its use of PFAS chemicals and defective combat weapons earplugs are getting all the attention. Additionally, we would like to point out the company’s history of missing growth guidelines and its disappointing performance, characterized by a long-term decline in profit margins. This comes after significant acquisition and divestiture activity, primarily in the healthcare sector, none of which appears to have contributed to profits.

MMM Gross Margin Data by YCharts.

Dividend issue?

Then there’s the tricky question of 3M’s dividend sustainability. Given the company’s proud history of dividend increases, the last thing management would probably want to do is cut the dividend. But some pressures are building that suggest it may be the best policy.

First, 3M plans to spin off its healthcare division Solventum in the first half of 2024. 3M holds a 19.9% ​​stake in Solventum and could sell it to raise cash, but it would lose steady cash flow from its healthcare business. It only increases the volatility of 3M’s cash flows.

Second, 3M is being paid cash through a legal settlement. CFO Monish Patrawala said at an investor conference that the combat weapons settlement is a “combination of $5 billion in cash and $1 billion in stock,” which will be “paid out over the next six to seven years.” ”. Meanwhile, the PFAS-related settlement will be “between $10.5 billion and $12.5 billion, with a current value of $10.3 billion, with payments to be made over 13 years.”

These are big cash calls, and Wall Street analysts expect 3M to generate $4.5 billion in free cash flow (FCF) in 2023 and $4.3 billion in 2024. These numbers easily cover the current $3.3 billion dividend. However, be careful with these FCF estimates. include Although the healthcare division will be spun off, 3M will still have to fund the legal settlement described by Patrawala above.

If management and the board decide that cutting the dividend is in the best interests of shareholders (represented by the board), it is certainly not a decision to be made lightly. Nevertheless, it’s a real possibility and casts a shadow over the stock’s outlook.

Image source: Getty Images.

Will 3M improve in 2024?

On a more positive note, there is evidence that the major restructuring measures taken in early 2023 are starting to take effect. For example, 3M’s profit margins are improving despite a deteriorating sales outlook. Additionally, management reiterated in its previous earnings call that it expects to realize a profit of $400 million to $450 million in 2023 and a total of $700 million to $900 million from 2023 to 2025. confirmed. These long-term annual benefits will be provided at once. In 2023 he will cost from $400 million to $450 million, and in 2025 he will cost from $700 million to $900 million.

Additionally, 3M enters 2024 with weaker sales momentum (3.7% third-quarter organic revenue), but lower interest rates should support key cyclical end markets such as electronics, automotive, and consumer spending. Dew. So don’t be surprised if 3M starts 2024 on a bad note and then starts to recover in the second half.

Image source: Getty Images.

Is 3M stock a buy?

Uncertainty surrounding dividends and short-term deterioration in end markets means 3M enters 2024 with question marks. On the other hand, there is some early evidence of improving margins and the prospect of lower interest rates through 2024, he said, is positive for industrial companies like 3M.

As such, 3M is probably not a buy for most investors. That said, it’s definitely worth monitoring the stock’s valuation to initiate a long-term position, assuming a buying opportunity presents itself in 2024.