3M (NYSE:MMM) stock price has begun to recover from one of the more significant drops in company history. An earnings miss related to the trade war and speculation about the security of the dividend of 3M stock have hammered the shares.
Both factors have added significant risk to a company most regard as stable. Although 3M stock price should recover, unusual risk factors make MMM stock suitable for only income-oriented, risk-tolerant investors.
Threats to 3M’s Dividend Hit 3M stock
In late April, 3M stock price went into free-fall following a massive earnings miss. The stock plunged by about 13% following the announcement. Warnings about the stability of the company’s dividend caused MMM stock further pain.
Last month, analyst Stephen Tusa of JPMorgan Chase (NYSE:JPM) kept his “underweight” rating on 3M stock and took his price target on MMM stock down to $143 per share. He also warned that the company could cut its dividend. Tusa’s note led to a further decline in 3M stock price over the next month. The drop would take MMM stock from a high of almost $220 per share to a low just above $159 per share.
Any time analysts talk about the end of a 60-year streak of dividend increases, it is a serious matter. Such an action could bring years of devastation and stagnation to 3M stock.
For now, traders have shrugged off the underweight rating. Just three weeks after hitting its 52-week low, the 3M stock price has risen to nearly $174 per share.
3M Is a Conglomerate
If only scotch tape and post-it notes held this company together, I would be wary of the move higher by 3M stock. However, much like another well-known conglomerate named Johnson & Johnson (NYSE:JNJ), 3M’s products extend across several divisions and industries. Health Care, 3M’s only division to report revenue growth last quarter, will likely receive a boost from the company’s recent $6.7 billion acquisition of Acelity.
Still, this diversification does not make 3M stock bulletproof. All one has to do is study the decline of General Electric (NYSE:GE) to know that older industrial conglomerates can face devastation and even fail. I see Tusa’s call on the dividend as extreme. However, if the U.S.-China trade war persists long enough, the dividend could be cut.
Do Not Forget the Trade War, Culture Risk
It is the trade war that I see as the most significant risk to 3M stock. The Asia-Pacific region, which includes both China and Japan, accounted for 31.3% of 3M’s overall revenue in 2018. The trade war has lasted longer than almost anyone thought it would.
Investors also need to consider cultural factors that statistics cannot quantify. China’s President, Xi Jinping, basically runs China as a dictatorship. While an end to the trade war would benefit both the Chinese people and 3M stock, dictators often act contrary to their people’s interest.
Another factor involves Chinese culture itself. The Chinese consider saving face quite important. This makes China unlikely to sign a trade deal that will make it appear to be the loser. As a result, not only must U.S. negotiators sign an agreement that works for America, but they must also create an arrangement that at least appears to benefit the Chinese.
This creates a conundrum for the owners of 3M stock, as such a deal could happen tomorrow, two years from now, or perhaps never. Still, I see reasons to buy MMM stock for those who can handle risk. The current price-earnings ratio of 3M stock is 18.5, which is below the historical average of 23.2. Moreover, most analysts believe the company’s earnings will resume growing next year, although their profit estimates likely factor in an end to the trade war.
Further, thanks to the decline of 3M stock price, 3M’s dividend yield now stands at about 3.3%. 3M pays out 58.6% of its income in dividends. If that percentage moves closer to 100%, the payout would be endangered. However, 3M has some cushion before it has to resort to ending its streak of payout hikes.
Final Thoughts on 3M Stock
3M stock carries culture-based risk which investors rarely consider. Consequently, MMM stock best suits investors who can tolerate risk and need income. JPMorgan’s Tusa may have exaggerated the threat to 3M’s dividend. Nonetheless, the trade war appears unlikely to end soon, and China accounts for a large percentage of 3M’s revenues.
But complicating an end to the trade war is China itself. Due to 3M’s dependence on China, the future of 3M depends heavily on a dictator who’s intent on saving face. This factor could make 3M stock riskier than it’s ever been.
MMM stock pays a generous, growing dividend. It also trades at a low multiple. However, with the future of the stock hanging on geopolitics and Chinese culture, only those willing to deal with those risk factors should buy the shares.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.