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Why Is 3M Still Cheap Despite Pandemic Success?

3M (NYSE:MMM) has become the name to know when it comes to facemasks. The company beat earnings estimates on the strength of its medical business. This includes those N95 facemasks everyone wants to avoid the virus. And yet MMM stock is still pretty cheap.

A stack of disposable face masks rests on a blue background.

Source: Shutterstock

In 2020, the company earned nearly $5.4 billion, $9.25 per share fully diluted, on sales of about $32.2 billion. It reduced debt during the year, and had over $8 billion in operating cash flow, $4.2 billion after paying out $3.8 billion in dividends. Management figures it can grow the company another 5% to 8% in 2021.

But the stock is still cheap. The price-to-earnings (P/E) ratio is just 19. The dividend yields a fat 3.35%. And yet no one seems in a rush to get it. There are 10 analysts on it, and two say sell.

No One Wants Value

3M is another example of a continuing trend. No one wants value in this market.

Despite a flood of retirees coming along looking to turn their IRAs and 401(k) winnings into regular income, stocks like MMM remain moribund. Options and momentum are negative. As one trader writes, “I don’t want to own” 3M.

Well, I do. If you’re retired or about to retire, you should too.

Over the last year, 3M stock is up about 11%. Add the dividend, and your total gain is 14%. Compare that to a 30-year bond at 2%.

The stock fell out of bed in mid-2019, after a weak earnings report and the $6.7 billion acquisition of Acelity, a wound-care expert. In the wake of all that, it cut share repurchases. Before that deal, shares were trading at $216. They haven’t gotten close to $200 since.

Still, you buy tomorrow, not yesterday. In the case of today’s Baby Boomer investors, you buy tomorrow and tomorrow and tomorrow. 3M has been paying a rising dividend for 62 years. Over the last five years the payout has increased from $1.11 per share to $1.48. It pays you to own it.

The 3M Future

This isn’t a food company or a consumer products outfit. One third of 3M sales come from products invented during the last five years. It’s a chemicals company, launching hundreds of new products each year. 3M Natural Pozzolans, for instance, is a powder added to cement that can reduce its environmental impact.

That innovation will be important as President Joe Biden’s administration looks to take aim at what it calls “forever chemicals,”  additives that can cause cancer and don’t degrade. The folks at 3M downplay the impact, disagree on their cleanup costs, but in the end will be cooperative. Rivals who can’t are going to be hurt.

Another brier patch 3M is happy to be thrown into is the controversy over counterfeit N95 masks. The company is busy verifying the legitimacy of such masks and helping destroy fakes. It’s a safety exercise but also a branding exercise.

The Bottom Line on MMM Stock

Right now, all stocks like MMM stock are “unloved and underpriced.”  In this market all the tech stocks are strong, all the SPACs are good looking, and all returns must be above average.

Compared to these companies, 3M may look a little woebegone. But this is the ideal stock for a retiree, and there are more retirees, or about-to-be retirees, than ever.

Two things are likely to happen when this pandemic ends. Millions of millennials are finally going to launch careers, and their Baby Boomer parents are going to look forward to a comfortable rest.

If you’re over 65 and need 20 years of steady income, 3M is a must-have.

At the time of publication, Dana Blankenhorn owned no shares (directly or indirectly) in companies mentioned in this story.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

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