The decline in 3M (NYSE:MMM) continues. Despite an earnings beat, the quarterly report initiated another selloff in 3M stock.
Thankfully for longs, it did not happen in the dramatic fashion that affected the company in the first quarter.
Nonetheless, it indicates MMM stock has not stopped falling. With stagnant growth forecasted and an ongoing trade war with no end in sight, I do not think investors should buy 3M at this time.
3M Wins and Still Disappoints
In a previous article, I proposed that 3M stock would not recover until the trade war ended. Since Asia makes up more than 30% of company revenues, I still do not see how the company prospers with uncertainty clouding such a large percentage of its revenue.
So far, this theory held up through second-quarter earnings. Even beating on both revenue and profits could not rescue the stock. Consequently, it has stagnated in the low-$160s per share level, near a point where it turned around in early June.
I agree with my colleague James Brumley who stated that conglomerates in today’s business world make much less sense. However, unlike Brumley, I do not think the time has come to start comparing 3M to General Electric (NYSE:GE). I need to see more bad news before I will start believing that it will fall that far.
While I disagree with InvestorPlace contributor Josh Enomoto overall on 3M, I find myself almost as impressed with the packaging material called the “Flex and Seal Shipping Roll.” It might even become their most popular creation in decades.
MMM Isn’t Cheap
Unfortunately for traders, cool products do not necessarily beget hot stocks. Even with the stock trading at bargain prices compared to this winter, I do not see the 2019 drop in MMM as enough.
The forward price-to-earnings (PE) ratio of 17.2 stands well below S&P 500 averages. However, with profit growth expected to average 3.43% per year over the next five years, I would not call that multiple “cheap.”
Moreover, the current dividend yield of about 3.5% significantly exceeds the S&P 500 average yield of 1.91%. The six decades of annual payout hikes build further confidence in both the dividend and the company itself.
Still, that payout now costs the company 67.55% of its net income, up from just 37% in 2011. While I do not think the company would end dividend hikes unless it was unavoidable, the payout has become a tremendous burden.
However, as I implied earlier, any doomsday prediction is premature at this stage. Perhaps the company will spin off divisions to improve their focus. Maybe their packaging material or other product will bring investors back to 3M.
Still, investors looking for a beleaguered stock in an established company with a decades-long history of dividend increases have more choices than 3M stock.
Companies such as AT&T (NYSE:T) and AbbVie (NYSE:ABBV) offer forward multiples in the single digits and payouts which rise every year and offer a yield exceeding 5%. Moreover, the path to recovery for both equities appears more evident than that of MMM stock.
The Bottom Line on 3M Stock
3M faces too much uncertainty to buy at current levels. One might think an earnings beat would send MMM stock higher, particularly after the massive selloff that followed its first-quarter report.
However, with its business in China facing uncertainty and its profit growth modest, investors have shown little inclination to pay 17.2 times forward earnings.
Moreover, a dividend payout ratio approaching 70% should create concerns about its six-decade streak of payout hikes.
3M is no GE. Company management still has time to turn this ship around. However, investors can find cheaper stocks which pay higher dividend yields and have a clearer path to recovery.
As of this writing, Will Healy is long ABBV stock. You can follow Will on Twitter at @HealyWriting.
