3M has completed the spinoff of its healthcare division. Is now the time to step into the stock?
There has been a massive overhang on 3M (MMM 0.87%) for several years from legal, regulatory, and corporate issues. Those are slowly being worked through, which is good news.
However, investors have to decide whether 3M today is the same as what 3M used to be. The answer is likely to be no; it isn't.
Sell 3M
There has been a series of problems facing 3M, and they all seemed to hit at one time. First, there were legal issues surrounding product liability because of earplugs the industrial company sold to the military.
Then, there were regulatory issues surrounding the company's production of forever chemicals, which quickly turned into legal issues, too. The company can't talk about legal matters until they are settled, so these problems have been a black box for a long time.
Image source: Getty Images.
Management has worked diligently to settle the legal issues and resolve environmental problems left behind by its forever-chemical production. It has even pledged to stop making forever chemicals, effectively shutting down a notable business division.
A lot has been achieved at great cost, but the story here is ongoing. So, this black box is better defined, but still a black box.
To raise the cash it needed to deal with the legal and regulatory headwinds, meanwhile, 3M was pretty much forced to spin off its healthcare division. This effort has now been completed.
While it provided a much-needed cash infusion, healthcare was supposed to be a growth engine for the company. So, 3M basically sold off the crown jewels to save itself, likely diminishing its prospects in the process.
Basically, 3M isn't going to be the same company it once was because major changes have taken place. If you bought 3M because it was a diversified industrial giant, you might want to reconsider that stance. The company is now smaller and operating in fewer growth-oriented industries. To top it off, the legal and regulatory headwinds are likely to linger for longer.
Hold 3M
If you have held on to 3M through all this business drama, maybe you want to keep it in your portfolio. After all, the yield is attractive at 6.3%. And the company is a Dividend King, with over six decades of annual dividend increases behind it.There's a little wrinkle here, too, however.
Because of the spinoff of what was a substantial business division, 3M is likely to reset the dividend. It warned in its first-quarter earnings announcement that after the spinoff of Solventum, its healthcare business, its dividend payout ratio is expected to be approximately 40% of adjusted free cash flow.
That's basically telegraphing a reduction in the payout. In other words, don't hold on to 3M just because of its dividend -- that's going to change, too.
The reason to stick around is because you believe that 3M can turn its business around as it slowly works through the issues it faces. That's a very different story and probably one that only more aggressive investors should be attracted to at this point.
Buy 3M
Which brings the story to whether or not you should buy 3M stock. For most investors, the answer is probably no; don't buy 3M.
The company is materially different today than it was just a few years ago. Most will want to see it move fully beyond the legal problems it faces before jumping aboard. To that end, it will be important for the company to prove its new business model after the spinoff of the healthcare division, but that will likely take a few quarters if not a few years.
To repeat, the only investors who should probably be looking at 3M today are those interested in turnaround stocks. This is a high-risk investment approach that requires a huge amount of faith. Given 3M's long history, it probably deserves to be given the benefit of the doubt on a turnaround; success is highly probable.
But how long will the turnaround take? How much business upside is possible now that the company has spun off healthcare? Are there still more costs to add to the billions already spent to resolve the legal and regulatory issues?
These are questions that most investors should want answered before they buy the stock. Only those who are aggressive and risk-tolerant should be looking at 3M right now.
Going in the right direction, but not there yet
There's no question that 3M has made a great deal of progress as it works through its list of problems. But that progress has fundamentally changed the company.
It is too early to tell whether that change will be enough to get this long-term dividend payer back on a constructive track or if it will end up in the doldrums for years to come. Unless you have a strong conviction about the success of 3M's turnaround, you should probably take a wait-and-see approach.
