Industrial conglomerate 3M(NYSE: MMM) spent 2018 to 2023 on a slow and steady downward slide. Several problems have ailed 3M stock, including lawsuits, growth concerns, and financial constraints from an expensive dividend. Some much-needed changes over the past year have dramatically lifted the market's sentiment toward the stock.
3M slashed its dividend to free up cash flow, spun off its healthcare business, drew much closer to settling most of the lawsuits it faced, and introduced a new CEO in March. These changes helped 3M stock rally over 50% over the past 12 months.
Given that rapid rise over a relatively short timeframe, is it too late to buy shares of this rejuvenated industry legend? Here is what you need to know.
3M's rally is warranted
Sometimes, uncertainty is worse than a company's actual problems. Simply arriving at solutions to 3M's various problems helped give investors much-needed confidence that the business was heading in the right direction.
The litigation was arguably the largest storm cloud hanging over 3M, so settling that was a big deal. The settlements will cost 3M a ton of money, including $10.3 billion related to lawsuits over PFAS chemicals and another $6.0 billion for lawsuits regarding defective earplugs. The earplug settlement will pay out through 2029, while the PFAS case will pay into the 2030s. It's a long-term drag on the business but doesn't completely strangle 3M's cash flow.
New CEO William Brown will continue making his mark on 3M, but investors have seemingly already liked what they've seen. 3M's Q2 earnings call touched on shifting from aging products to faster-growing end markets, including auto electrification, industrial automation, data centers and semis, climate tech, and others. Brown also said he's evaluating 3M's research and development spend and the company's portfolio for potential mergers and acquisitions. This top-to-bottom approach could inject new life into a company that has arguably grown stagnant.
3M gave up its dividend growth streak, losing its Dividend King status. However, the new dividend cost just 33% of the company's free cash flow in Q2, leaving cash available for share repurchases (management bought back $400 million worth of stock in Q2) and growth investments. Plus, investors still get a 2.1% dividend yield today.
Overall, 3M seems like it's in a better place today than in recent memory.
The growth outlook for 3M is unclear
Change is exciting, but it takes time for new leadership to evaluate, arrive at conclusions, implement changes, and then have those trickle through the business. It's been a wild ride through the pandemic when 3M enjoyed high respirator demand. But as the dust settles, 3M stands today with less annual revenue than it had a decade ago:
MMM Revenue (TTM) data by YCharts
It's hard to evaluate 3M's growth opportunities without knowing the changes a new CEO might make over the next six to 18 months. Additionally, William Brown admitted on the Q2 call that 3M's product shifts toward growth will take time and that they're too small to move the needle right now. That means investors may want to pump the brakes on short- and medium-term expectations.
Today, analysts believe the company will grow earnings by an average of 7.5% annually over the next three to five years. That's solid for a mature business, but investors must be careful not to overpay for this type of stock.
Should investors still buy 3M stock?
It's fair to wonder how much near-term upside 3M stock has left after such an epic run. Shares now trade at a forward P/E of more than 18. That's not egregiously expensive for a company growing earnings at a mid- to high-single-digit rate, but it appears 3M has left bargain territory. One could argue that 3M is fairly valued for its anticipated growth, which gives investors a shot at 9% to 10% annual investment returns when factoring in both earnings growth and dividends. The stock's long-term performance will likely depend on the changes William Brown makes at 3M and their effectiveness.
It's not too late to consider buying 3M stock if you want solid growth potential and a decent dividend. However, any quick gains have probably been made at this point.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
