Industrial giant 3M just spun off a growth business, leaving it with a less attractive portfolio...and large legal headwinds.
There is no way to sugarcoat it: 3M (MMM 0.87%) has not been a particularly rewarding investment over the past decade, with the price currently about 15% lower than where it was 10 years ago. But the real turning point came in 2018, when the industrial giant's legal and regulatory headwinds started to pick up. Since that high-water mark, the stock price has been cut in half. Is this a turnaround play that could make you a millionaire? Let's take a look.
The problems 3M has faced
The big negatives surrounding 3M are in the legal and regulatory spheres. For many years it has been fighting product liability claims driven by earplugs it sold to the military, contamination issues at facilities that created what are colloquially known as forever chemicals, and lawsuits that arose from the forever chemical contamination problem. 3M is almost certainly going to survive these problems, but the industrial company isn't going to be the same business it once was.
Image source: Getty Images.
That's already evident. Given the billions of dollars 3M expects to incur, it was forced to spin off its healthcare division in an attempt to raise cash. That move has indeed strengthened its financial position. But healthcare was expected to be 3M's big growth engine. It basically had to sell off the crown jewels in order to save itself.
The divisions that have been left behind (safety and industrial, transportation and electronics, and consumer) are attractive businesses, but they just aren't likely to expand as quickly as healthcare. So 3M, which has historically been a slow-and-steady grower, is likely to be an even slower grower in the future. Given the huge legal expenses it faces, that's probably not a bad outcome, but it isn't exactly a great one, either.
Less to be excited about at 3M
After the healthcare spinoff, 3M also reset its dividend, cutting it from $1.51 per share per quarter to just $0.70. The healthcare division didn't make up anywhere near half of 3M's business, so the board's dividend cut was much deeper than investors might have been expecting. There are likely two reasons for this decision: freeing up extra cash over the near term and giving the company a lower base from which it can raise the dividend in the future (perhaps allowing for faster dividend growth).
Still, this is just one more way in which the long-term story for 3M has changed thanks to the massive legal and regulatory headwinds it has been dealing with. And those headwinds aren't actually over yet, so this turnaround story is still in motion. That should keep most investors on the sidelines for now. Dividend investors probably shouldn't consider the stock, period, until dividend growth resumes.
But what about investors who like turnaround plays? Could 3M's problems open up the possibility of making millionaires out of those willing to risk an investment in the stock? It's certainly possible, but it doesn't exactly seem probable unless you buy and hold the shares for a very long time. The company's fundamental makeup has altered in a way that suggests growth will be slower in the future than it has been in the past.
There's probably sizable recovery potential once the legal issues are hammered out more fully. But the upside is likely to be capped by the reduced potential for growth. Even if the stock was able to rise back to its 2018 high-water mark, which would double the share price, it would require a massive initial investment to be a millionaire-making gain.
A different company that's not as attractive
To be fair, 3M has a long and storied history. But it just isn't the same company it was a few years ago, and the businesses left behind after the healthcare spinoff aren't likely to offer huge growth potential. It is hard to see a near-term future, given the current situation, in which 3M is a millionaire-maker stock.
Reuben Gregg Brewer has positions in 3M. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
