It’s very rare that a core, world-class dividend stock goes on sale. It seems that 3M (MMM) has been on sale for a number of years now, with the discounts getting more heavy in recent years. There’s rarely a free lunch with investing. Meaning: When a stock goes down, there is typically a reason. The question, however, is can the company survive the challenges it faces and re-emerge as a winner? I just published an in-depth video on YouTube sharing my thoughts on 3M’s Q2 earnings report, with my thoughts on their large litigation risks. Without a doubt, MMM is one of the riskier positions in my portfolio, especially when I take into consideration that its ~5.0% portfolio weight. In today’s blog post, I want to share a few of my top-level thoughts about 3M (MMM), but first make sure to watch my YouTube video!
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Thought 1: The Litigation Risk Is Real
3M stock is rallying on the news that they are creating a $1 billion trust for earplug litigation related to their acquisition of Aearo Tech back in 2008. They are also setting aside another $240 million for case-related expenses. I believe the stock has rallied on this news because 1) the exposure is less than previously anticipated and 2) there is some directional level of certainty around the matter (Wall Street hates uncertainty). (Side note: I like to buy when there is uncertainty because I can extract value that way as a long-term investor taking on calculated risk.)
The bigger issue, in my eyes, is their PFAS-related litigation. PFAS is a chemical that can seep into water, air, and soil. At this point in time, the cost of possible/alleged PFAS-relate exposure is unknown. What I do know, however, is we live in a world where anything is possible. Just look at 2022. In fact, I just shared a Dividend Investing Video that highlights some crazy, remarkable trends affecting investors in 2022. Because it’s almost impossible to price risk in 2022, I personally have big concerns around PFAS litigation. (And, the rest of the investing community does as well, hence the forward PE ratio trending in the 13s for MMM.)
Thought 2: I’m Excited About The Healthcare Spin-Off
Also in their Q2 earnings release, 3M announced the spin-off of their healthcare division (anticipated to close by the end of 2023). I was excited to see this because 1) it probably allows the healthcare division to avoid some of the existing litigation risk, 2) healthcare is their fastest-growing division, and 3) I see this being a productive spin-off (much like UTX combining with Raytheon and spinning off OTIS and CARR). I plan to hold onto both New 3M and Healthcare Spin-Off. The only downside here is I’m now going to have yet another position to manage. I have too many positions in my portfolio, and will eventually need to start trimming down, just a little bit.
Thought 3: I Bought A Lot More. What Else Can I Do?
As a dividend stock investor, I am fighting tooth and nail to reach the goal of dividend-based FIRE (financial independence retire early). I’ve made great progress against this goal, but I’m still on the journey. Our world is more uncertain than ever. There is more perceived “risk” in anything these days. MMM is a risky position in my portfolio, but ultimately I’m taking on calculated risk to reach my gaol. At a 4.19% starting dividend yield (with possible growth ahead once litigation is figured out), I cannot ignore the opportunity. What else can I do? Sit home, scared? Or, go out there and fight for my dividend-based freedom? I am choosing the latter, for my personal situation.
Please share in the comments below what you think about 3M stock. As a dividend investor, it’s a bit challenging to see the slow pace of dividend growth in recent years. That being said, the reasonable payout ratio gives me confidence that stronger dividend growth may resume after the litigation challenges have passed. It’s just going to take a good amount of patience. Perhaps I’ll just let this one be (with dividend reinvestment intact) and check back in 5 years.
As we close out today, I want to say “Aloha” and “Mahalo” for reading my blog post and watching my latest YouTube video. Please make sure to subscribe to my YouTube channel for more dividend investing videos.
DISCLOSURE: I am long 3M (MMM), United Technologies (UTX), Otis (OTIS), and Carrier (CARR). I own these stocks in my personal dividend stock portfolio.
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