3M Stock Is an Attractive Defensive Play
With its shares down more than 24% since January, is 3M (NYSE:MMM) stock a buy? The market maelstrom has made blue-chip names like this industrial conglomerate worth buying. A true “dividend aristocrat,” the stock now sports a healthy 4.3% yield. But that’s not all! Since the stock’s valuation is reasonable, it gives investors a chance to own a high-quality stock at a fair price.
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The question is if the market has reached a bottom. Fear and uncertainty continue to plague investors. Even though markets may drop further, 3M is a defensive stock, so it could provide investors with a good opportunity.
Let’s dive in and see why MMM stock could be a buy at today’s prices.
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Why Consider MMM Stock Today?
It makes sense for investors to be skeptical of 3M stock. As InvestorPlace columnist Tom Taulli noted in his column published on Mar. 11, the company has a few ongoing catalysts at this point. Many could think the coronavirus from China would boost the company, since 3M makes respiratory masks. But, with its revenue from coronavirus-related products projected to be just $250 million, they probably won’t be a needle-mover for the company.
If anything, coronavirus is as much a negative catalyst for MMM stock as it is for other big industrial names. Since much of 3M’s revenue comes from China, that nation’s slow recovery will make 3M’s path forward difficult. And that is on top of the company’s existing operating challenges.
Between 2018 and 2019, its sales dipped from $32.8 billion to $32.1 billion. In the same time frame, its net income dropped from $5.4 billion to $4.6 billion. Clearly, the company needs to get back on the growth train. But, after 3M lowered its 2020 profit forecast, don’t expect that to happen anytime soon.
Upbeat catalysts may be a stretch, but how about the stock’s valuation? 3M’s shares look reasonably priced, with a forward price-earnings (P/E) ratio of 14.2. Granted, its peers, including Honeywell (NYSE:HON), sell at similar valuations (Honeywell has a forward P/E ratio of 15). Other industrial conglomerates, like General Electric (NYSE:GE) sell at even lower forward multiples (GE’s forward P/E is 12.9).
So, with minimal catalysts and a fair, but not a low, valuation, why should investors buy MMM stock today? Simply put, they could take advantage of a likely future flight-to-safety trend . As a Seeking Alpha contributor recently noted, 3M has historically been a great defensive stock. Add in the stock’s strong dividend (see below), and the shares offer investors a lot.
Buy for the Dividend, Stay for the Rebound?
The key positive trait of MMM stock is its dividend. It’s increased its dividend 61 years in a row. With its high yield, the stock is one of the best blue-chip dividend plays out there.
Yet 3M’s payout ratio is a concern. The company now pays out 62% of its earnings in the form of dividends. Since its earnings may dip this year, it’s possible that the company will tighten its belt. I don’t think 3M, which has increased its annual payout by an average of 11% over the last five years, will reduce or cut its dividend. The company, however, may increase its payout more modestly than 11%.
Nevertheless, 3M’s dividend may be one of the safer ones out there. With blue chips like ExxonMobil (NYSE:XOM) rumored to be planning dividend cuts, income investors should consider more stable opportunities than that venerable oil company.
3M stock could also be a “buy for the dividend, stay for the rebound” opportunity. I’m not the only one who thinks the stock could rally tremendously. Melius Research’s Scott Davis upgraded 3M’s shares last month from “hold” to “buy,” giving the stock a $205 per share price target.
While $205 per share seems rich compared to the stock’s current prices, Davis believes the company’s businesses, which were already in a down cycle, are about to improve. But analysts concede that the company still faces several risks, besides China’s slow recovery. For one, the company’s potential liabilities from its past use of PFAS (polyfluoroalkyl) substances could hurt it. Gordon Haskett’s John Inch believes 3M’s total PFAS liability could top $15 billion. Yet all of these negative factors could already be priced into the shares, considering their poor performance in 2019, even as the S&P 500 made new highs.
3M Is a Long-Term Buy at Today’s Prices
Weighing opportunities against risk, 3M at first glance doesn’t look like a strong buy. Despite respirator masks flying off shelves, 3M’s potential revenue from them isn’t exactly a needle-mover. Factoring in recent risks like coronavirus, along with past issues such as weak sales growth and PFAS liabilities, investors should be cautious.
Yet much of these issues could already be priced into the shares. With 3M stock already “priced for disaster,” investors can buy the stock now and start collecting an above-average dividend yield. Once the markets rebound, the stock could soar back to its prior level of around $175 per share.
That won’t happen tomorrow. It may not happen six months from now. But over the long-term, MMM stock could make an epic rebound. At today’s distressed prices, its shares may now be a good opportunity for shrewd investors.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.
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