3M (MMM) is an iconic industrials sector business that was founded in 1902 and has paid rising dividends for an incredible 64 consecutive years; this large cap company currently has a market cap of more than $68 billion, explains Ben Reynolds, editor of Sure Dividend.
While 3M has a long history of success, it’s currently facing a legal battle surrounding claims that nearly 300,000 earplugs provided to U.S. combat troops by 3M subsidiary Aearo Technologies were defective. On July 26th, 2022, 3M announced that Aearo Technologies had filed for bankruptcy.
But unfortunately for 3M, on August 26th, 2022, 3M announced that the court decided Aearo’s bankruptcy would not protect 3M from earplug litigation. On October 13th, 2022, a federal appeals court agreed to hear 3M’s appeal related to the lower court’s ruling.
The largest corporate settlement in history outside of the ‘Big Tobacco’ settlement is BP’s $20 billion settlement (paid out over 15-18 years) for the Gulf of Mexico oil spill disaster. And ~75% of that settlement is tax deductible. This should be viewed as an absolute worst-case scenario for 3M, with the actual settlement likely to be much less (it looks more similar to cases that came in for $2 billion to $3 billion in my non-legal-expert view).
For comparison, the company’s after-tax profit has been more than $4 billion every year from 2012 through 2021. While it’s impossible to know the full extent of the damages this court battle will result in for 3M, I don’t believe the company is at risk of insolvency from this — nor do I believe the long-growing dividend is at risk.
And as for current earnings power, 3M’s 3rd quarter 2022 earnings release showed adjusted earnings-per-share guidance for fiscal 2022 of $10.10 to $10.35. For comparison, the company generated adjusted earnings per share of $6.32 in fiscal 2012 (10 years ago), peak adjusted earnings-per-share of $10.46 in 2018, and $10.12 in adjusted earnings-per-share last year (fiscal 2021).
The company’s stock trades for a price-to-earnings ratio of just 12.2 using fiscal 2023 guidance midpoint expected adjusted earnings-per-share of $10.22. The company has regularly traded for a price-to-earnings ratio of ~20 historically. We believe a fair price-to-earnings ratio for 3M is ~17, implying ~40% upside from current prices.
In addition to the low price-to-earnings ratio, 3M stock also offers investors a high dividend yield of 4.8%. And the dividend is likely to grow in the future based on the company’s long streak of rising dividends.
We expect moderate growth of ~5% annually for 3M. This growth coupled with the company’s low valuation and high yield makes 3M a compelling choice for investors interested in buying into a high-quality business with a shareholder friendly management at a discount price.
