There’s no denying 3M (NYSE:MMM) stock is, despite all of its woes, still a dividend champ. With February’s increased payout now on the books, the annual payout of 3M stock has climbed for 61 consecutive years. And, with a dividend of $5.76 per share of 3M stock scheduled for 2019, there’s tons of wiggle room for 3M, since analysts, on average, are calling for full-year earnings of $9.40 per share.
But even with 3M stock price beaten down to near $173 and MMM stock yielding 3.26%, the shares aren’t appealing. This company’s got problems, and its China headwind may be the least of them.
The foremost challenge facing 3M stock may be its ultra-diversified business model itself, followed closely by waning loyalty towards its brand.
A Symptom of a Bigger Illness
This coming Thursday, 3M will reveal its second-quarter results. For better or worse, the bar for its Q2 results is set low. After 3M lowered its full-year profit outlook when it released its weaker-than expected Q1 results, analysts, on average, are only calling for Q2 income of $2.06 per share of 3M stock. The company reported EPS of $2.59 in the same quarter a year earlier.
China received the lion’s share of the blame for the Q1 EPS miss. Though 3M’s year-over-year sales fell by higher percentages in Europe, Middle East and Africa, China is a much bigger market than they are. The Q1 revenue of 3M’s Asia-Pacific unit fell 7.4% YoY.
That decline, however, wasn’t offset by its North American revenue., as its U.S. sales inched up a paltry 0.1%. Perhaps worse, its total organic sales volume fell somewhat dramatically.
That’s an indirect sign that 3M may not command the same kind of pricing power it enjoyed just a few years ago.
That certainly jives with data indicating that consumers and corporations aren’t as loyal to particular brands as they used to be. They don’t have to be. The advent of the internet has given rise to transparency. With equivalent alternatives now readily available at lower prices, buyers of all ilks are choosing options besides 3M.
More than that, though, 3M is arguably ill-equipped to restore the kind of brand loyalty that can meaningfully improve its pricing power and sales volume.
Conglomerates Are Broken
There was a time when conglomerates worked. Dissimilar organizations under the same umbrella could at least share shipping costs, while similar products could be cross-promoted. Think Procter & Gamble (NYSE:PG) selling detergent to the same customers who usually buy its paper towels.
Once again though, the advent of the internet has largely negated that edge. Anyone can start a business and reach P&G’s customers all over the world. Indeed, smaller outfits like Dollar Shave Club have capitalized on doing one thing incredibly well: utilizing clever marketing to chip away at dominant names in the business like Gillette and Schick.
Noteworthy is the fact that Dollar Shave, along with similarly small startups like Harry, have been acquired by big conglomerates. Equally noteworthy is the fact that the conglomerates that acquired them have largely left them alone.
That, in turn, has lead some owners of 3M stock to wonder if the company’s office-supply arm would be better served by operating on its own.
As for 3M’s more industrial-oriented product lines, rival brands haven’t been the problem as much as size and saturation. A lack of focus, however, could still be a key liability for 3M.
That’s certainly been the case for General Electric (NYSE:GE).
For decades it successfully managed to operate businesses ranging from light bulbs to locomotives to life sciences. It could do so because the world moved slowly, and competition wasn’t everywhere. With China now fully industrialized, digitalized and capitalized, though, speed matters. Saturated markets matter. The large amount of manpower needed to manage such complex enterprise now gets in the way. There’s a reason GE is now selling assets.
The Bottom Line on 3M Stock
None of this means that 3M can’t move past its hurdles, restore pricing power and optimize its conglomerate in a way few other companies are even willing to try anymore. Anything’s possible.
Even before it’s fully addressed its more philosophical challenges, though, it’s making itself even more complicated. 3M announced in early May that it would be acquiring wound-care company Acelity for a hefty $6.7 billion as a means of ramping up the growth of its healthcare business, whose 2018 results were disappointing. But if the company can’t sell what it already makes, what assurance can it offer investors that it can sell Acelity’s products any more effectively?
There may be a legitimate answer to the question, but if there is, it wasn’t passed along to the owners of MMM stock.
Meanwhile, investors may be cheering for a turnaround, but there are reasons 3M stock price continues to make lower lows. There’s a lot of work, longer-term initiatives, and tough decisions that 3M needs to make at this point, but it doesn’t appear the company is ready for that just yet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.