Up 38% YTD, is This Dividend Stock Overbought?

3M Company (MMM)has been performing exceptionally well, with its 38% year-to-date increase leading the Dow Jones Industrial Average($DOWI). The stock shot up after its latest earnings report beat expectations, painting a rosy picture for the future. 

Despite the breakout performance, 3M stock still has an overall “hold” rating from analysts, and its historic dividend cut earlier this year rattled many investors who have long favored the stock for its yield. Meanwhile, the recent rally has now pushed 3M's share price north of the mean price target set by Wall Street. After such a big run-up, it's fair to ask - is 3M now overbought?

Let’s examine 3M's recent market performance, evaluate its fundamentals and dividend strategy, and analyze the mixed ratings from analysts to see if the stock is a little frothy at current levels, or if Wall Street might be overlooking some hidden value.

3M's Post-Surge Stock Valuation

Valued at $70.5 billion, 3M (MMM) is a diversified tech conglomerate with a vast portfolio of over 60,000 products, operating across sectors including industrial, safety, and consumer goods, all while focusing on innovation and sustainability. 

Following its nearly 23% post-earnings pop on July 26, MMM is fresh off a new 2-year high of $128.65.

The Turnaround Takes Shape at 3M

And 3M's Q2 earnings report was cause for celebration, as it crushed estimates on both the top and bottom lines. The company reported $6.3 billion in sales, down 0.5% year-over-year, but adjusted sales of $6.0 billion showed 1.2% organic growth. GAAP EPS from continuing operations jumped 117% to $2.17, while adjusted EPS rose 39% to $1.93 - well above the $1.66 consensus.

Plus, 3M generated $1.0 billion in operating cash flow and $1.2 billion in adjusted free cash flow, reflecting its efforts to streamline operations and boost efficiency.

In terms of expansion, 3M's been making some bold moves lately by putting serious cash into Ohmium International, a company working on green hydrogen tech. It's all part of 3M's plan to help fight climate change - and maybe even clean up its own act. Elsewhere, they're also beefing up their Valley, Nebraska plant, dropping $67 million to ramp up production and create 40 new jobs. 

3M's updated earnings outlook for 2024 shows they're executing well operationally. They now expect full-year adjusted EPS between $7.00 and $7.30, up from the previous $6.80 to $7.30. This bump reflects their confidence in driving steady organic revenue growth and improving performance. 

New CEO Bill Brown also backed 3M's forecast for total sales growth between -0.25% and +1.75%, with organic sales growth expected to be flat to +2%.

3M's Updated Dividend Strategy

Earlier this year, for the first time in over 60 years, 3M took a knife to its dividend, cutting it down to $0.70 per share for Q2 2024. This cash-preserving move was made after they spun off their healthcare division, Solventum (SOLV). This means 3M's no longer a Dividend King, but it does mean they have a smarter capital allocation strategy for their current structure - and they're still paying out a current yield of 2.20%.

Now, 3M is putting about 40% of their adjusted free cash flow into dividends, down from over 60% before. It's a savvy move to keep the company's finances stable over the long term, especially as they're figuring out life after the spinoff, and looking to invest in future growth.

On the valuation front, 3M's forward P/E ratio of 17.56 is a little higher than its 5-year historical average, but still represents a discount to the broader industrial sector median. 

Analysts Warm Up to 3M… But Slowly

Despite these positive signs, analysts are still mixed. Out of 12 analysts, the consensus is a "hold" rating, with 4 recommending a “strong buy,” 6 suggesting a “hold,” and 2 advising a “strong sell.” The mean price target is $123.15, narrowly below Thursday's close.

However, analysts are warming up to the Dow component. MMM now has 5 “strong buy” ratings to its name, up from just one a few months ago. 

Recently, Deutsche Bank upgraded 3M from “hold” to “buy” and bumped its price target from $110 to $150, suggesting an 18.6% upside potential - and representing a new Street-high target for the stock. 

Is 3M Overbought - or an Overlooked Gem?

3M's strategic restructuring and strong earnings make its recent breakout on the charts look well-deserved. With a solid earnings outlook and a smart dividend tweak, the company seems well-positioned for future growth. Despite tepid analyst ratings overall, the warming mood on Wall Street suggests that more bullish notes could be in store for 3M. 

While the stock looks technically overbought in the short term and could consolidate some of its earnings-related gains in the days ahead, this industrial giant hardly looks overvalued at current levels. For dividend investors with a long-term view, 3M's mix of innovation and financial savvy makes it a compelling buy.