3M Company (NYSE:MMM) is a decades-old company that manufactures and sells industrial, safety, and consumer products worldwide. The company is known for its 60-plus-year history of consistently increasing dividends and is included in the S&P 500 Dividend Aristocrats list. However, the overhang of the foam earplug and PFAS litigations (per-and poly-fluoroalkyl substances) compel analysts to believe that 3M will end up paying huge sums to settle the cases and be forced to cut its dividend payments. Consequently, this may steal away MMM’s dividend aristocrats’ crown.
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Recently, Wolfe Research analyst Nigel Coe slashed the price target on MMM to $92 (10.1% downside potential) from $110 while maintaining a Sell rating. Overall, on TipRanks, 3M has a Moderate Sell consensus rating based on six Holds and five Sell ratings. Also, the average 3M Company price target of $105.91 implies 3.5% upside potential from current levels.
3M has a current dividend yield of 5.72%, one of the largest in the Industrial Goods sector and impressively above the sector average of 1.64%. Plus, it boasts a healthy payout ratio of 63.48% and has been paying dividends for 100 years. Even so, 3M stock has lost 14.1% year-to-date, and analysts have turned bearish on the stock’s trajectory owing to the ongoing litigations.
Lawsuits Will Cost Billions of Dollars in Settlements
3M is fighting some 300,000 claims for its defective foam earplugs used by U.S. combat troops. The company is already in talks to settle the cases, which, as analysts calculate, may end up costing 3M over $10 billion.
Additionally, MMM is also facing multiple lawsuits for the manufacturing of PFAS chemicals, alleging that these man-made chemicals have contaminated drinking water and led to serious illnesses. The potential expenses associated with settling lawsuits filed by municipalities over drinking water contamination could amount to an additional $10 billion.
A combination of both of these settlements could force MMM to cut its dividends, analysts believe, a move that would take away its Dividend Aristocrats label, as per protocol. Furthermore, analysts believe that should 3M take on additional debt to finance the settlement charges in the current high-interest rate environment, it would mean the company would have to bear very high-interest expenses. All of these will eat into the company’s margins and profits.
Is 3M Going to Split?
On a positive note, 3M is mulling over spinning off its healthcare business and listing it as a public entity, a strategy disclosed last year. The company hopes to retain a 19.9% equity stake in the newly listed healthcare business, which could fetch it north of $3.2 billion if it were to sell the shares. Additionally, as part of the spin-off agreement, the healthcare unit will pay a one-time dividend of $6.7 billion to the parent entity. Although these sums will add to 3M’s cash flows, they may not be enough to sustain both the huge dividends and the mounting settlement charges.
Even so, analyst Deane Dray of RBC Capital believes the healthcare spin-off will make 3M a relatively smaller company with a lesser dividend payout and yield, and ultimately strip off its Dividend Aristocrats’ tag.
Despite all the flaws, investors looking for the most accurate and profitable analyst for MMM could follow Barclays analyst Julian Mitchell. Copying his trades on this stock and holding each position for one year could result in 65% of your transactions generating a profit, with an average return of a modest 4.60% per trade. Add that to your consistent dividend income, and you could end up making good returns on your MMM investment.
