A series of strategic financial decisions aimed at resolving longstanding legal disputes and refocusing its business operations puts 3M in a stronger position going forward. Even though the company cut its dividend as a result of a spinoff, the new rate is more sustainable. Job cuts and other restructuring measures should spur its earnings.
The stock trades at 14.9 times the company’s 2024 earnings forecast.
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3M COMPANY (New York symbol MMM; www.3m.com) makes over 55,000 consumer and industrial goods, including air purifiers, adhesives, bandages and components for medical devices. Its main brands include Post-it notes, Scotch tape, Scotch-Brite cleaning products, Scotchguard protection and Thinsulate insulation.
The company recently agreed to settle lawsuits related to the release of polyfluoroalkyl substances (PFAS) from its operations in several U.S. cities. Under the settlement, 3M will pay $10.3 billion over the next 13 years.
As well, it has agreed to settle claims regarding defects in earplugs it manufactured for the U.S. Army. Between 2023 and 2029, 3M will pay a total of $6.0 billion, consisting of $5.0 billion in cash and $1.0 billion in common shares.
On April 1, 2024, 3M completed its plan to spin off its Health Care division as an independent firm called SOLVENTUM CORP. (New York symbol SOLV). That business makes products to treat and prevent infection in wounds, dental filling materials, and filtration and purification products.
Shareholders received one share of Solventum for every four shares they held. 3M still owns 19.9% of Solventum, but plans to sell those shares over the next five years.
As a result of the spinoff, 3M is cutting your quarterly dividend by 53.6%. Starting with the June 2024 payment, investors will receive $0.70 a share instead of $1.51. The new annual rate of $2.80 yields 2.7%. The lower dividend rate should be more sustainable without the cash flow from Solventum.
Investors should note that Solventum plans to focus on paying down its long-term debt of $8.30 billion, or 73% of its $10.9 billion market cap, instead of paying a dividend.
In the three months ended March 31, 2024, 3M’s sales (including Solventum) fell 0.3%, to $8.00 billion from $8.03 billion a year earlier. New automotive and electronic products offset weaker sales of consumer products. If you exclude unusual items, earnings rose 21.3%, to $2.39 a share from $1.97.
3M expects its sales for all of 2024 will rise about 1%. It also predicts its earnings will range from $6.80 to $7.30 a share. The stock trades at a reasonable 14.9 times the midpoint of that range.
With this cut, 3M’s annual dividend rate has now declined by an average 13.4% in the past 5 years. Its TSI Dividend Sustainability Rating is now Average.
Recommendation in Wall Street Stock Forecaster: 3M Company is a buy.
