The past month hasn’t been a particularly enjoyable one for the owners of 3M (NYSE:MMM) stock. In the latter part of April, the highly-diversified company cautioned that weakness in China would take a toll on its 2019 bottom line, and just a couple of weeks ago, an analyst warned the dividend that had made MMM stock a hero to income-minded investors was in jeopardy.
All told, the 27% dip in the 3M stock price since Apr. 25 makes superficial sense. Under the surface, though, the depth of the selloff of MMM stock may not hold up to scrutiny.
Buying 3M stock looks tantamount to catching a falling knife, with no assurance any rebound will take shape now, if at all. For an investor with a little money to play with and a willingness to keep MMM stock on a short leash though, the shares look interesting now.
An Analyst’s Take on MMM Stock
Writing about the dividend of 3M stock in mid-May, J.P. Morgan analyst Stephen Tusa stated, “Another leg down in fundamentals would mean they are on watch for a cut, after 37 straight years of increase.”
A year ago, such a development would have been unthinkable. Many of the old-guard names have already taken such a step, however. General Electric (NYSE:GE) started to pare back its payout in 2017, and more than a little legitimate-sounding dividend-cut chatter has plagued the likes of Ford Motor (NYSE:F) and AT&T (NYSE:T) for awhile now. So a dividend cut by 3M somehow doesn’t seem out of the question.
It’s not just the dividend Tusa is concerned about, however. He’s also worried about the bigger picture. He wrote,”While there are clearly some cyclical forces at play, we continue to believe the secular story, while less readily apparent, is challenged. This late in the cycle, defense growth garners an appropriate premium, and here we see neither defense, nor growth.”
Tusa concludes of MMM stock that “premium valuation is unjustified by undifferentiated fundamentals.”
Numerical Reality
It’s entirely possible he’s right. But, it’s also entirely possible Tusa is overdoing it by giving MMM stock an “underweight” rating.
As of the latest look, the analyst community is, on average, modeling earnings of $9.52 per share of 3M stock for the current fiscal year, down decidedly from last year’s $10.46 on what should be a very slight drop in revenue. Weakness in China and other overseas markets are taking a bigger bite out of profits than sales, and with no end to the trade war in sight, investors have easily been led to assume the worst.
The dividend, however, isn’t in the deep jeopardy that’s been implied.
Over the course of the past four quarters, 3M has dished out total dividends of $5.52 per share. For the next four years, analysts, on average, are calling for a total payout of $5.76 per share of MMM stock. That still leaves a cushion in excess of $3.70 per share between the company’s anticipated EPS and its expected dividend in 2019. That spread should widen again in 2020.
But the amount of income the company will be able to retain for itself and invest in its future growth will be lower than in the past. Tusa is also worried about growing legal liabilities that may “significantly weigh on capital deployment capabilities – which has historically largely driven EPS growth.”
The organization has finally begun cutting costs, though. After releasing last quarter’s disappointing results and equally disappointing outlook, 3M announced it would lay 2000 employees off.
The Bottom Line on MMM Stock
None of this serves as a guarantee that 3M won’t cut its dividend. But, given the unlikelihood of that development in addition to the steep, exaggerated selloff MMM stock price has suffered over the course of the past five weeks, MMM stock is an interesting contrarian pickup at this point.
Many analysts don’t disagree. Despite the spate of bad news and the subsequent streak of downgrades, the professionals still sport a consensus price target on 3M stock of $188. That’s 17% better than the current MMM stock price, which has been beaten down mostly by noise and fear.
Nothing ailing 3M right now is insurmountable, and almost all of its problems are finally being addressed.
MMM stock may be a knife worth trying to catch.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
