Editor’s note: “3M (MMM) Stock Remains an Attractive Defensive Play” was previously published in March 20. It is regularly updated to include the most relevant information.
With its shares rebounding around 39% from their 52-week lows, is 3M (NYSE:MMM) stock a buy? March’s market maelstrom made blue-chip names like industrial conglomerate MMM stock worth buying.
A true “dividend aristocrat,” the stock currently sports a healthy 3.75% yield. But that’s not all! Since the stock’s valuation is reasonable, it gives investors a chance to own a high-quality stock at a fair price.
The question is whether the recent market rebound can continue. Especially if a “V-shaped recovery” looks debatable. But, though markets may do a 180 in the short-term, 3M is a defensive stock, so it could provide investors with a good opportunity.
Let’s dive in and see why 3M stock could be a buy at today’s prices.
Why Consider MMM Stock Today?
Today’s enviornment is not the best of times for industrial conglomerates like 3M. Nevertheless, the company posted strong results when it announced earnings back in April. This may not be a surprise, given increased demand for the company’s respiratory masks in the wake of coronavirus. Yet, this tailwind only resulted in $100 million of additional quarterly revenue.
Overall, sales have been weak as of late. In May alone, revenue fell 20% year-over-year. This is greater than the 11% YoY sales decline seen in April. In short, the pandemic continues to affect the company’s operations.
Even before the outbreak, things were not so hot for 3M.
Between 2018 and 2019, its sales dipped from $32.8 billion to $32.1 billion. In the same time frame, its net income dropped from $5.4 billion to $4.6 billion. Recent sales declines only compound the growth issues with this company.
Upbeat catalysts may be a stretch, but how about the stock’s valuation? 3M’s shares look reasonably priced, with a forward price-earnings (P/E) ratio of 19.4. Granted, its peers, including Honeywell (NYSE:HON), sell at similar valuations (Honeywell has a forward P/E ratio of 20.7). But, other industrial conglomerates, like General Electric (NYSE:GE) trade at higher multiples (GE has a forward P/E ratio of 63.5).
So, with minimal catalysts and a fair, but not a low, valuation, why should investors buy 3M stock today? Simply put, they could take advantage of a likely future flight-to-safety trend. InvestorPlace’s Josh Enomoto recently included it in a list of stocks to buy to weather the recession. It short, stocks like this one could perform well, whether the economy quickly rebounds or not post-coronavirus.
Add in the stock’s strong dividend (see below), and the shares offer investors a lot.
Buy for the Dividend, Stay for the Rebound?
The key positive trait of 3M is its dividend. It’s increased its dividend 61 years in a row. With its high yield, the stock is one of the best blue-chip dividend plays out there.
Yet 3M’s payout ratio is a concern. The company now pays out 73% of its earnings in the form of dividends. Since its earnings may dip this year, it’s possible that the company will tighten its belt. I don’t think 3M, which has increased its annual payout by an average of 11% over the last five years, will reduce or cut its dividend. The company, however, may increase its payout more modestly than 11%.
Nevertheless, 3M’s dividend may be one of the safer ones out there. As dividend investing has become riskier, it’s better to be more selective when it comes to buying stocks for their yield.
3M stock could also be a “buy for the dividend, stay for the rebound” opportunity. I’m not the only one who thinks the stock could continue to climb higher. In April, CFRA’s Colin Scarola upgraded shares from “hold” to “buy,” giving the stock a $177 per share price target.
His rationale? The analyst sees demand for coronavirus equipment minimizing revenue declines. However, given the recent weak sales numbers, this doesn’t appear to have panned out.
Also, other analysts say that the company still faces several risks, besides continued global economic weakness.
For one, the company’s potential liabilities from its past use of PFAS (polyfluoroalkyl) substances could hurt it. Gordon Haskett’s John Inch believes 3M’s total PFAS liability could top $15 billion. Yet all of these negative factors could already be priced into the shares, considering their poor performance in 2019, even as the S&P 500 made new highs.
3M Is a Long-Term Buy at Today’s Prices
Weighing opportunities against risk, 3M at first glance doesn’t look like a strong buy. Despite respirator masks flying off shelves, 3M’s potential revenue from them isn’t exactly a needle-mover. Sales continue to be affected by the coronavirus. Past issues, such as PFAS liabilities, could still be in play. In short, investors should be cautious.
Yet these concerns could already be priced into shares. Investors can buy reasonably-priced 3M stock now, and start collecting an above-average dividend yield. As markets rebound, the stock could continue trending higher, perhaps retracing its past 52-week high of $187.72 per share.
In short, consider 3M a safe harbor with the potential to move higher as markets recover. At today’s prices, its shares may still be a lower-risk opportunity with upside potential.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.