3M’s (MMM) Comeback Looks Solid, But Its Dividends Are Less Attractive

After a solid performance since its lows in October 2023, 3M Company (MMM) is back on track, up by 60% over the past year, following major internal changes over the last couple of years with a more promising outlook for 2025 and beyond. Even though I believe the investment thesis around 3M should be based on dividends rather than value, I maintain a neutral stance on the stock, as valuations are no longer that compelling, and dividends likely won’t be as attractive as they were in the recent past anytime soon.

However, as the company gears up to report its Q4 and full 2024 results on January 21, before the market opens, I wouldn’t be overly impressed if 3M reported another beat across the board. In this article, I’ll discuss 3M’s turnaround progress, its dividend and valuation appeal, and what to expect ahead of the company’s upcoming earnings report.

CEO Shift and Significant Changes at 3M

Some of the reasons why I’m more skeptical about 3M stock come from the role it plays within a defensive portfolio, especially with a focus on dividends.

For starters, two years ago, 3M had a dividend yield ranging close to 5%. A big part of that increase in dividend yield was due to a sharp drop in the stock price. Between 2021 and 2023, the company saw its market value cut in half, mainly because of a slowdown in top-line growth and, more significantly, earplug and other litigation liabilities, which added billions in obligations on the company’s historically strong balance sheet and cash flows.

Since hitting its all-time lows in October 2023, 3M has started to turn things around—defining where the liabilities were, spinning off Solventum (former 3M health division), and appointing a new CEO, Bill Brown, in May 2024. Since then, the stock has rallied more than 90% from its lowest point in the last five years, with most of those gains happening in 2024.

The catch, though, is that with the recent restructuring, 3M cut its payout by 33% in 2024. Add that to the rebound in share price, and the company ended 2024 with a dividend yield of 2.68%—not bad, but definitely not as appealing as before.

Making Strides in Operational Restructuring

Although I still have some reservations about going bullish on 3M right now, it’s worth noting that progress has been made in recent quarters, even if it’s been somewhat timid. Analysts are forecasting that 3M’s sales and EBITDA will continue to decline for Fiscal 2024 by -10% and -8%, respectively.

While I believe the new CEO can succeed in improving margins going forward, the best-case scenario is that the company achieves flat bottom-line growth in the short to medium term. For reference, 3M has provided guidance for the full year 2024 with organic sales growth of 1% year-over-year and EPS guidance of $7.2 to $7.30. This guidance was actually raised from the previous estimates of $7 to $7.3.

This more favorable outlook is in addition to a significant improvement in operational efficiency, as evidenced by the expansion in operating margins in Q3 to 23%, up 1.4 percentage points year-over-year. These same tailwinds have also helped improve free cash flow, which generated $1.5 billion in Q3, allowing the company to distribute $1.1 billion between dividends and buybacks in the quarter.

3M Seems Expensive and Needs to Grow Into Multiple

To reiterate my neutral stance on 3M, based on current multiples, I believe the recent surge in share price due to turnaround efforts may be fairly priced. The company trades at a forward P/E ratio of ~19x, which is ~22% above its historical average over the last five years, and the dividend yield isn’t as attractive as it has been in past years—especially considering the U.S. 10-year Treasury yield at 4.6%.

A lot of this optimism, I believe, comes from analysts forecasting gross margins (currently at 45%) to expand throughout 2025, potentially returning to the company’s average of 46% over the last five years, thanks to efforts to streamline operations.

In any case, even with bottom-line growth expected to resume by the end of 2025, with 3M potentially delivering an annual EPS of $7.83 (a 7.5% growth from 2024), the company’s 2025 P/E will still be at 17.6x, which is still more stretched than 3M’s own historical average over the last half-decade.

A Word On Q4 Earnings

On January 21, 3M is scheduled to report its Q4 results, with the market expecting the company to post EPS of $1.67 and sales of $5.79 billion, already factoring in the increases from the annual guidance revised in Q3.

In general, while a beat across the board could be enough to push shares to new highs, I think the main topic of discussion on earnings day will be around margins. I expect 3M to keep its focus on operational transformation initiatives, which should continue to drive improvements in areas like R&D effectiveness and manufacturing efficiency, translating into more compelling gross margins.

Moreover, the management team mentioned last quarter that new product launches are expected to be up about 10% in 2024, with further acceleration this year. So, 3M is making tangible progress in revamping its innovation pipeline, which could be a key driver of long-term growth. As a result, the guidance for full-year 2025 could come as a pleasant surprise.

Is 3M a Buy?

On Wall Street, the bullish consensus around 3M stock prevails, with five out of ten analysts giving it a buy recommendation, resulting in a Moderate Buy rating. Of the others, three have neutral recommendations and two have bearish ones. The average price target is $150.44, which suggests a ~9% upside potential based on the latest price.

See more MMM analyst ratings

Conclusion

3M is heading into Fiscal 2025 in a more solidly structured position than in past years and could finally return to top- and bottom-line growth. The Q4 numbers will likely confirm this trend. However, given the still cautious outlook, I believe that with valuations at historically high levels and dividend appeal fading, there are few advantages to buying the stock at this point.

Disclosure