Now is the perfect time to buy 3M shares
Big companies don’t go up for sale very often because, quite simply, everyone knows they are big companies. And yet, no business manages to avoid the tough times that put investors on high alert.
Right now industrial giant 3M (NYSE: MMM) faces company-specific issues, and although the market as a whole is near record highs, its stock price looks quite attractive today. Here are four reasons why now is a great time to buy 3M.
1. 3M’s dividend yield is enviable compared to the S&P 500
Most investors do not fully exploit the information provided by a company’s dividend yield. This is especially true for companies that have long backed their dividend through thick and thin, like 3M. To put that number, the industrial conglomerate has increased its dividend every year for more than six decades, making it a much-vaunted dividend king. In other words, its dividend payout is probably the most consistent thing in a company’s financial statements, which is why performance can be such a powerful valuation tool.
Today, 3M offers investors a dividend yield of 3.2%. In absolute terms, it’s not huge. But it turns out that it’s way more than the 1.3% you’d get from a S&P 500 index fund. And, more importantly, it is also at the top of the historical return range of the company. This suggests that 3M stock is historically cheap right now.
2. 3M is in a full-blown bear market
In addition to showing a high yield, 3M’s stock is also in the doldrums. This is, to some extent, part of the yield calculation, since dividend yield and stock prices move in opposite directions. But there is a reason to take a step back and look at stock numbers as well.
Specifically, the current 3M share price is almost 30% lower than its early 2018 highs. A market correction is typically assumed to be down around 10%. A bear market is generally considered to have started with a 20% decline. So 30% puts 3M firmly in bear market territory, and for investors willing to think long-term, that’s another reason to love this longtime dividend-payer.
3. 3M has diversification, size and strength
Then there’s the fact that 3M is a powerhouse of a company, with a massive portfolio of proprietary products, many of which are developed in-house, spread across sectors such as security and industry (33% of revenue segment), transport and electronics (26%), healthcare (24%) and consumers (the rest). The segment’s worst operating margin in the recently completed third quarter was 19% in its transportation and electronics division. Each business, meanwhile, experienced organic growth in the quarter, with healthcare being the worst at 3.3%. In other words, 3M has a diverse business and is doing quite well.
On top of that, the company has an investment grade track record. And it has a market cap of $ 105 billion. These are by no means guarantees of success, but they do suggest that 3M has sufficient capacity to deal with the headwinds of the business should they occur.
4. That too will pass
This brings us to the biggest problem 3M is currently facing: lawsuits. These are no small issues, far from the imagination, related to the contamination of some of the company’s previous manufacturing facilities and questions about the ability of earplugs sold to the military to actually prevent hearing loss. Worse yet, resolving these issues can take some time, as the legal system often moves at a snail’s speed.
However, given the size and financial strength of the business, it should be able to take the hit. Notably, there is also insurance to help offset the pain, although the company will not discuss details on this front. And given that the market has responded to legal headwinds by pushing the stock to around 30% and the dividend yield to a historically high 3.2%, that might not be the worst thing for investors. who can think long term.
Indeed, it is the legal headwind, which must obviously be watched, which presented an opportunity to buy 3M at a fair, if not attractive, price. As noted, large companies don’t go up for sale often, but when they do, you need to act despite the negatives.
Don’t let this opportunity pass
To be fair, 3M is not a catastrophic investment right now. You need to go about it knowing that the legal issues it faces will persist for years to come and could, once resolved, harm the image and finances of the business. You cannot ignore the concerns. But, the stock looks relatively cheap today, given the drop in price and high yield.
And yet the company is large, financially strong and diverse. The issues, well, they’ll end up being sorted out somehow and probably won’t change the long-term future of this well-run industrial giant. This suggests that, despite legal concerns, now is probably the time for investors to buy 3M.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.