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A common theme among value-oriented investors is that you have to buy when others are fearful. That is exactly the situation today with 3M (MMM -1.19%), which has seen its stock trend largely lower since 2018. If you have the stomach to take a contrarian stance, however, now could be a great time to add this stock to your portfolio.
There are some pretty positive things about 3M that make it an attractive investment. For example, the dividend has been increased for over six decades, making it a highly elite Dividend King. You don’t build a record like that by accident or without surviving some adversity along the way. Historically speaking, the over-100-year-old company has proven it can muddle through hard times.
image source: Getty Images.
Meanwhile, the company has a vast portfolio of products that span across multiple sectors. Diversification is good for your portfolio, and it can be good for a company’s business, too. At this point, 3M breaks its operations down across the safety & industrial, transportation & electronics, healthcare, and consumer sectors. The company operates in the industrial space, which makes its business cyclical, but having a host of businesses has helped to support its long-term success.
3M also has a strong balance sheet. Specifically, it has been awarded an investment-grade rating by the financial ratings agencies. That means that it should have relatively easy access to debt capital should it need it. To be fair, its 1.1 times debt-to-equity ratio is toward the high end of its historical range, but 3M covers its trailing 12-month interest expenses by a solid 18 times. There seems to be little reason to worry about its financial strength right now.
Last but not least, 3M’s dividend yield is a historically high 4.9%. That suggests that the stock is trading at an attractive price.
All of that said, 3M is probably not a great call for risk-averse investors. There are a couple of reasons for this. The most immediate is the fact that 3M is a cyclical stock and the global economy looks likely to face challenges over the near term. There are multiple reasons for this, including inflation, rising interest rates (which are being used to fight inflation), and geopolitical tensions. Management can’t control these things, but they will still have an impact on the company’s results. So the next year or so could be difficult for the business, though so far it has been doing about as well as you could expect. Notably, organic growth was up 2% year over year in the third quarter of 2022, and each of its business lines had operating margins over 20%.
The longer-term issue is the bigger concern. 3M is facing a number of large legal/regulatory issues on the product liability and environmental front. Without getting too deep into the woods, it produced earplugs for the U.S. military that those now suing the company say were defective. In a separate case, chemicals 3M used in its plants that don’t break down easily have been found in the environment around its plants and now must be cleaned up. (The company recently vowed to stop making the chemicals altogether.) Both of these problems could be pretty big financially speaking. That has investors shunning the stock.
Given 3M’s financial strength and size (it has an over-$65 billion market cap, even after a 50% decline in the stock price), it seems likely that it will muddle through these headwinds. That’s backed up by the fact that comparable legal and regulatory issues have faced companies like Altria and Johnson & Johnson. These industry giants survived and continued to thrive and reward investors with robust dividends. This won’t make dealing with 3M’s issues any easier, but that’s the point of investing in it today. While others are afraid of the worst, you are, basically, betting that it won’t be as bad as feared.
If you seek to avoid risk at all cost, 3M is not for you. There are likely to be a lot of ups and downs before it has moved past the legal and regulatory issues it faces today. The news flow will be ugly, creating material headline risk. However, if you can think long-term and are willing to be a contrarian, this industrial giant appears to be very cheap right now. Eventually, other investors will figure this out, so you might want to hold your nose and buy before they do.
Reuben Gregg Brewer has positions in 3m. The Motley Fool recommends 3m and Johnson & Johnson. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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