Im this close to sending out a buy call on a stock thatif I doI know would light up the phone lines (and customer-service inbox!) at our New York office.
Theres a good reason why: Imagine being along for this drop.
New Watch-List Addition Sheds Two-Thirds of Its Value
(Heck, given that this stock was till recently a staple of many dividend portfolios, maybe you dont have to imagine.)
Thats the peak-to-trough dive on 3M Co. (MMM) in the last six years. To put it in perspective, it came as the broader S&P 500 gained 79%.
I know that buyingor even consideringa stock with a chart like this gives many folks heart palpitations. But dumpster-dive moments like these are often the best time to buy. And make no mistake, 3M has stepped on every banana peel (and garden rake!) there is.
Right now its facing:
A cut, or a failure to hike, would drop 3M out of the Dividend Aristocrats, the 68 S&P 500 stocks that have raised their dividends for 25 years or more.
I know what youre thinking: Brett, youre really considering buying a stock with a possible dividend cut ahead?
This situation reminds me of the words of Howard Marks, the most successful value investor no one has ever heard of (except Warren Buffett, whos a fan). Marks wrote:
The ultimately most profitable investment actions are by definition contrarian: youre buying when everyone else is selling (and the price is thus low) or youre selling when everyone else is buying (and the price is high).
But he admits this isnt easy:
These actions are lonely and uncomfortable.
Lets get into our turnaround case, starting with 3Ms main strength: a ton of brand loyalty. In all, the company peddles 12,000+ home-and-workplace staples under a bevy of labels, including Scotch, Post-It and Filtrete.
This, by the way, is one reason why Wall Street hates 3M: With a product list larger than the population of a decent-sized town, its always been tough to value. Much easier for the suits to keep track of the five models offered by Tesla (TSLA)!
Cue the Reboot
That leads us to 3Ms free cash flow (FCF), which is our go-to profitability metric when looking at any dividend-payer because unlike earnings per share, FCF cant be manipulated by accounting.
In the last year, FCF was healthy, at $5.1 billion.
FCF did take a hit during the pandemic. But that was then. Nowadays, being in the office (at least a few days a week) is back, baby! In New York, some 80% of workers have been safely returned to their cubicles, according to Bloomberg.
Thats just starting to show up in 3Ms FCF:
3Ms Cash Flow Rises as Offices Fill Up
Whats more, 3M is taking steps to put its other woes in the rear-view.
3M Can Handle Its Legal Issues
Last year, the company settled two lawsuitsone over earplugs it sold to the US military and another over its use of so-called forever chemicals, which dont break down easily, found in drinking water. As mentioned, the total bill was $16 billion.
Thats a big number, of courseand its why the last few hangers-on have thrown in the towel on the stock.
But this seemingly heavy burden really isnt that bad: 3M has 13 years to pay the $10-billion chemical settlement. Thats around $800 million a year. The earplug agreement will be up to $6 billion paid over seven years between 2023 and 2029.
3Ms FCF can easily handle these costs, and thats before accounting for any growth, which, as we just saw, looks like its starting to kick in.
Investors Often Put Too Much Focus on Legal Woes
This story reminds me of AmeriSource Bergen, since rebranded to Cencora (COR)who picks these names?a drug distributor we recommended in my Hidden Yields service in June 2020.
AmeriSources shares then, like 3Ms now, were weighed down by litigation, in its case related to the opioid crisis.
But from a purely investment standpoint, worries about the $25-billion settlement (split between ABC and two other drug distributors) were overdone. As with 3M, ABCs portion of the settlement was payable over a long time18 years, to be exact. The net effect on FCF was less than 25%.
So we bought. And when we sold in December 2022, we took home a 69% total return.
A 69% Return in Less Than 3 Years
Next, lets talk about the recent spinoff of 3Ms medical-devices business, now called Solventum (SOLV). The spinoff will streamline 3M. It will also shave about $700 million to $800 million off the parent firms FCF.
On the plus side, Solventum took $8.3 billion of the parent firms debt with it, lowering future borrowing costs. Rising office-product demand will help 3Ms cash flow, too.
As a result of these worries, MMM trades at just 1.6-times sales, just over half its five-year average of 2.6! Which brings us to that 6.5% dividend.
Lets Let the Payout Dictate Our Next Move
Finally, the dividendwhich is the one reason were holding off on a buy here. The upshot here is that a cut has been priced in. And we can be relatively sure that any cut would be one and done.
Chief financial officers are like carpenters. Its best to measure twice and cut only once.
As a result, the safest dividend is often the one that has recently been cut. Unless management is a clown show (and 3Ms is not), the last thing they want is to have to cut twice when they had to be strapped to the gurney to do it once!
3M would be a good buy before a dividend cut. But it could be a great buy after one (or after it gets booted from the Aristocrats). Lets let the spinoff dust settle and give management time to sort out its next dividend move. When (and if) the time is right, Ill issue a buy call in Hidden Yields.
Were NOT Waiting for 3MLets Buy These 5 Forever Dividends Now
Even though Im not quite ready to issue a buy call on 3M, its exactly the type of stock we want to own now: a proven, cash-generating business thats been unfairly tossed in the bargain bin.
That way, if rates stay higher for longer and the market slips, these stocks cheap valuations will hedge our downside. And when rates (inevitably) fall, theyll take off.
And well enjoy their surging dividends the entire time!
As I said, Im waiting for managements decision on the dividend to make the final call on 3M. But that could take till next February, and were not waiting around.
Right now Im urging investors to buy 5 other recession-resistant stocks with dividends that are not only growing but accelerating. Thats grabbing investors attention, and theyre bidding up these stocks prices in lockstep.
These 5 stocksall Hidden Yields recommendationsare also (for now!) trading at bargain valuations, helping hedge our downside in a pullback and making them truly recession-resistant picks.
The bottom line: Ive got these 5 picks pegged for 15%+ annualized total returns for years to come.
Its time to make our move.