When I’m vetting stocks to add to my long-term holdings, I have to think very differently than I do when I’m swing trading or scalping.
For one thing, I commit to blocking out the noise and focusing on the company’s long-term viability; moreover, I look at its dividend as a sign that the company is in good health and likes to reward loyal shareholders.
Besides being a long-standing Dow Jones component, 3M Company (NYSE:MMM) offers a compelling 3.31% dividend yield; that’s not too bad at all. That alone wouldn’t be enough to convince me to buy 3M stock, though, so I have to weigh a multitude of other factors.
3M Stock Price Is Nice
To begin with, the 3M stock price is closer to its 52-week low of $159.32 than its 52-week high of $219.75. Some traders might view that as a red flag, but I’m a contrarian by nature, especially when I’m thinking about the long-term outlook of a stock. In the case of 3M stock, I really like the idea of accumulating shares at the current valuation and collecting dividends until the price reclaims its previous 52-week high.
If your broker has granted you permission to trade options – and if you have enough free capital in your brokerage account to buy 100 shares of MMM stock – you could collect what I call a “second dividend” by purchasing 100 MMM shares and selling an at-the-money covered call option. Between the premium payment you’ll collect and the quarterly dividend payments, you could actually earn some meaningful income even if 3M stock price stays relatively flat.
Analysts Like 3M Stock
I’m not one to blindly follow analysts’ price targets, but I’ll generally give more credence to the research firms than the retail crowd because the firms have better research and analysis tools at their disposal. Concerning 3M stock, the average 12-month price target among brokerages that have issued a report on it in the last year is $188.33, indicating an upbeat outlook overall.
Citigroup’s price target of $221 on 3M stock is particularly optimistic, while Gorden Haskett’s $191.98 price objective is also fairly ambitious. The insider buying activity of 3M Director Gregory R. Page, who recently purchased 1,000 shares and is currently the owner of 4,000 shares of the company, is also a positive sign in my humble opinion.
You Take the Good, You Take the Bad
Critics of the company were quick to cite 3M’s disappointing first-quarter 2019 earnings report, which was released on April 25. But I’m encouraged by the fact that 3M CEO Mike Roman openly acknowledged that the company’s adjusted Q1 EPS of $2.23 versus last year’s $2.50 (a drop of 10.8% year-over-year) was disappointing.
Beyond just admitting the problem, Roman cited 3M’s plan to rectify the company’s short-term issues:
We have stepped up additional actions – including restructuring – to drive productivity, reduce costs, and increase cash flow as we manage through challenges in some of our end markets.
Roman also detailed how 3M plans to reorganize itself in order to meet consumers’ demands going forward:
We recently implemented a significant portfolio realignment from five to four business groups, which will enable us to better serve our customers and global markets.
And let’s not ignore the good news: 3M’s Q1 GAAP (Generally Accepted Accounting Principles) earnings came in at $1.51 per share, an astounding 54.1% YoY jump. Plus, 3M paid $830 million in dividends to the owners of 3M stock and repurchased $701 million shares of MMM stock
during the quarter. For long-term investors like myself, robust dividends and share buybacks are signs that a company is in good health and confident in its own fiscal future.
The Bottom Line on 3M Stock
The critics will always be able to find something to complain about, but when I look at 3M, I see a Dow stalwart with a solid plan and the potential to beat Q2 expectations; moreover, the compelling 3M stock price and its generous dividend payouts complete the picture of a stock that’s earned my seal of approval.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.