3M (NYSE:MMM) CEO Mike Roman announced on March 23 that the company doubled the monthly production of its N95 masks to almost 100 million. Further, it plans to double that number to 200 million over the next 12 months with 90% targeted for use by health care workers.
3M is clearly doing its part to fight the coronavirus but that doesn’t appear to be doing any good for MMM stock. Down 28.4% year to date and 37.3% over the past 52 weeks, including dividends, through March 20, the lack of conviction from investors doesn’t come as a surprise. I said as much on Feb. 20.
“3M might have ramped up production for its respiratory masks, but that business isn’t going to be the difference in it getting to $250 where it traded as recently as February 2018,” I wrote back then.
3M Is a Possible Value Play
My colleague, Josh Enomoto, made an impassioned argument earlier this year that 3M would remain relevant because there’s always going to be a demand for analog products such as N95 masks. Seven weeks later, that’s become the understatement of the year.
Further, he argued that 3M stock was attractively priced with a dividend payment that’s currently yielding 5.1% — the company announced on February 4, a dividend increase of 2%, to $1.47 per quarter ($5.88 annualized), its 62nd consecutive year with an increase — making it a potential deep-value play.
Although 3M’s faced many headwinds in the past 12-18 months, if a Dividend Aristocrat like 3M can’t attract investors, there’s not much hope for the rest of the S&P 500.
3M is doing its part in the fight against the coronavirus and for that, it’s to be commended. While its decline in 2020 isn’t any worse than the entire U.S. markets as a whole, there doesn’t appear to be anything, including doubling the production of N95 masks, that will turn investors from bears to bulls.
That said, some of my other InvestorPlace colleagues have recently made some bullish-like comments about the industrial conglomerate.
Laura Hoy, who is generally very conservative in her stock analysis, recently made MMM a good long-term dividend stock pick because its dividend payment is as tough as its N95 masks. Virtually indestructible.
Thomas Niel believes that the stock’s current downturn provides investors with an opportunity to buy a high-quality stock at a fair price.
“So, with minimal catalysts and a fair, but not a low, valuation, why should investors buy MMM stock today?” Niel wrote March 20.
“Simply put, they could take advantage of a likely future flight-to-safety trend. As a Seeking Alpha contributor recently noted, 3M has historically been a great defensive stock. Add in the stock’s strong dividend, and the shares offer investors a lot.”
The Bottom Line on MMM Stock
I haven’t been very enthusiastic about MMM stock primarily because of the lack of growth catalysts. However, that didn’t stop me from recommending its stock last July, suggesting its expected free cash flow generation in 2019 of almost $5.6 billion, made it a very attractive stock to hold.
Fast forward to today. 3M finished fiscal 2019 with record free cash flow of $5.4 billion. Sure, it was $200 million less than its guidance, but it was still a record. That should count for something. In addition, it converted 118% of its net income to free cash flow. Anything above 100% is a very efficient use of its free cash flow.
Based on its 2019 free cash flow and an enterprise value of $90.7 billion, it has a free cash flow yield of 6.0%. While I don’t consider that value territory (anything over 8%), the stock’s correction over the past year has made it more attractively priced.
If you go back to the financial crisis and look at 3M’s free cash flow from the years 2007 through 2010, you’ll see that it never got lower than $2.85 billion (2007). That’s vital in times of significant uncertainty.
As such, I agree with my colleague Thomas Niel. 3M has become an attractive defensive play worth owning. That’s especially true under $100.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.