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Ahead of Next Week’s Earnings, Should Investors Buy 3M Stock Into Weakness?

Tezcan Gecgil

3M Company (NYSE:MMM), a coveted member of the Dow Jones Industrial Average since 1976, is an industrial conglomerate. The group got its start in the early 20th century by extracting corundum mineral.

Ahead of Next Week's Earnings, Should Investors Buy 3M Stock Into Weakness?

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These days, however, 3M stock has expanded beyond corundum to the point of recent conundrum. After reaching an all-time high of $259.77 in Jan. 2018, MMM stock price has been in a multi-month decline. Year-to-date, 3M stock price which has missed the broader market rally in 2019, is down about 8%.

As MMM stock gets ready to report earnings on July 25, many of our readers are wondering whether July may offer a good entry point into MMM shares, which are currently trading around $175. Here is a candid look at the the prospects for 3M stock so that potential investors may decide if the shares should belong in their long-term portfolio.

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How Does 3M Stock Make Money?

Although most consumers first think of 3M’s ever-popular signature products, e.g., Scotch Tapes and Post-it Pads, the company produces and sells a diverse line of products ranging from adhesive tapes to air filters, filters for computer screens, heatshrink tubing, knee supports, lint rollers, lubricants, safety goggles, and sand paper.

To be more precise, its current product range includes over 50,000 items. In other words, most consumers would probably feel somewhat lost while looking through 3M’s website. And very few companies would have the capital, time, or technology to build market share in many of the lines of business.

The group divides its business into five segments:

  • Industrial (such as tapes, adhesives, and supply chain management software);
  • Safety and Graphics (such as protective gear and security products);
  • Electronics and Energy (such as fibers and circuits);
  • Health Care (such as medical and surgical products as well as drug delivery systems); and
  • Consumer (such office supplies and home improvement products).

However, with this kind of growth and business range, a big headache has also come; 3M Company is simply too large to run efficiently, i.e., bigger is not necessarily better.

MMM Stock’s First-Quarter Results Were Disappointing

On Apr. 25, 3M released Q1 2019 results with lower-than-expected earnings. CEO Mike Roman summed up the earnings results in one sentence when he said “The first quarter was a disappointing start to the year for 3M.

MMM stock’s EPS came at $2.23, adjusted vs. $2.49 expected. Revenue was $7.863 billion, instead of the expected $8.025 billion. Management partly blamed a litigation-related pretax charge of $548 million, or 72 cents per share, for the poor results.

The group also cut 2019 guidance and announced plans to lay off 2,000 workers. Wall Street was not impressed and the stock tumbled.

Going forward 3M’s five business segments will be restructured into four.  Management has been trying to paint a better future picture for MMM stock as the company believes it will increase productivity, reduce costs, and increase cash flow levels.

However, Wall Street is not necessarily hopeful about the company’s upcoming Q2 results as many analysts do not necessarily expect 3M stock’s results to show any signs of real recovery.

Is MMM Stock’s Dividend Safe?

In a low-interest rate environment, stock investors pay special attention to shares with robust dividend yields. Dividend stocks can be one of the best ways to generate a regular passive income for long-term shareholders.

In general, big blue-chip names tend to be consistently generous dividend payers. And 3M, which has increased its dividend for decades, has traditionally been regarded as a safe dividend play.

Yet with the recent poor results and on-going issues, analysts have also started wondering whether MMM stock’s dividend may also be cut.

The dividend payout ratio can show investors if a stock is paying out either less or more than the company earns. In other words, if a company earns $1 per share but pays a dividend of $1.30, management may have to decrease the dividend at some point in the near future. A payout ratio of over 100% means that a company is paying out more in dividends than it earns.


MMM stock’s payout ratio is 0.59 which makes the dividend sustainable as long as the company keeps the earnings around the current levels. However, in case of a miss in earnings, I’d become sceptical of the dividend amount and would even expect a cut.

Experienced dividend investors also pay close attention to a company’s free cash flow as dividends are ultimately paid out of cash.

Free cash flow is what remains in the bank after 3M has paid interest on its debt, paid any taxes owed, and made all of the capital expenditures necessary to run and invest in the giant business. MMM stock’s capital structure has been under stress due to legal liabilities and decreasing revenue.

Companies do not cut dividends in good times. And 3M Company is clearly going thorugh a difficult  patch in its history. If there were further external events (such as increased trade tensions with China or a slowing down of the U.S. economy) as well as company-specific problems, it is possible that management may take the extraordinary measure of cutting MMM stock’s dividend.

Where is 3M Stock Price Now?

On June 3, MMM stock hit a 52-week low at $159.32. In other words, as it hovers around $175, 3M stock is trading just above its 52-week lows right now. The downtrend since Jan. 2018 as well as Apr. 25, 2019 is a stark reminder that its all-time high of $259.77 is now in the rear-view mirror.

If you are an investor who also pays attention to technical analysis, then you may want to know that over the past 18 months, 3M stock has suffered from a damaging technical picture.

In addition to its long-term technical chart which still looks weak, MMM stock’s short-term technical chart, trend lines and support and resistance levels, are telling investors to exercise caution.

Although MMM stock’s momentum indicators, which describe the speed at which prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time, especially when the overall trend is down.

Therefore, buy signals based on momentum indicators need to be confirmed with further chart analysis before the stock is a buy from a technical standpoint.

Among 10 Wall Street analysts, there is one strong buy rating, seven hold ratings (which effectively mean sell) and two sell ratings on 3M stock. Recently its price target was cut from $201 to $182. In other words, could MMM share price have already seen the high for 2019?

If there is any broader market weakness, say due to market worries over U.S.-China trade wars, 3M stock price may be further adversely affected.

At this point, the bulls are not yet in control and the selling pressure has increased especially after the Q1 earnings report of April 25. Therefore MMM shares will need a catalyst to make them attractive in the eyes of long-term investors, who are probably still skeptical about the near-term prospects for the company.

The Bottom Line on MMM Stock

I am of the camp that 3M stock’s price weakness is a clear reflection of investor sentiment and major fundamental worries, especially regarding a large conglomerate with legal woes and which is going through a major restructuring process amidst falling revenues.

If you aren’t already long MMM stock, you may want to remain on the sidelines until the earnings report on July 25 to give yourself time to study the balance sheet as well as the outlook by the management. Many questions, such as the effects of the current trade wars, decreasing margins, falling revenues, viability of the dividend as well as the level of free cash flow, remain yet to be answered.

If you already own 3M shares, you may also consider initiating covered call positions in conjunction with being long MMM stock. For example, Aug. 16 expiry at-the-money (ATM) covered calls may enable you to hedge your long position in case of profit-taking following the earnings report. You would also be able to participate in a further up move in 3M stock price.

If you are considering investing in 3M stock, you may want to start building a position between the $150 and $160, and expect to hold the stock for several years.

Investors who are interested in buying into 3M Company shares, but do not want to commit all their capital to a single stock may also consider investing in various exchange-traded Funds (ETFs) that have MMM stock as a holding, including the SPDR Dow JoneIndustrial Average ETF (NYSEARCA:DIA), Industrial Select Sector SPDR (NYSEARCA:XLI), or iShares Core High Dividend ETF (NYSEARCA:HDV).

As of this writing, the author did not hold a position in any of the aforementioned securities.

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